Which of the Following Procedures Best Accounts for the Relative

question 36

Multiple Choice

Which of the following procedures best accounts for the relative risk of a proposed project?

• A) Adjusting the discount rate downward if the project is judged to have above-average risk.
• B) Reducing the NPV by 10% for risky projects.
• C) Picking a risk factor equal to the average discount rate.
• D) Ignoring risk because project risk cannot be measured accurately.
• E) Adjusting the discount rate upward if the project is judged to have above-average risk.

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Definitions:

Solvency

The ability of a business to meet its long-term debts and financial obligations.

Liquidity Ratio

A financial metric used to determine a company's ability to pay off its short-term liabilities with its available liquid assets.

Profitability Ratio

Financial metrics that are used to assess a business's ability to generate income relative to its revenue, assets, or equity.

Solvency Ratio

Solvency Ratio indicates a company's ability to meet its long-term debts and obligations, measuring the size of its after-tax income relative to its liabilities.