Wansley Enterprises Is Considering a New Project

question 20

Multiple Choice

Wansley Enterprises is considering a new project.The company has a beta of 1.0, and its sales and profits are positively correlated with the overall economy.The company estimates that the proposed new project would have a higher standard deviation and coefficient of variation than an average company project.Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong.On the basis of this information, which of the following statements is CORRECT?

• A) The proposed new project would increase the firm's corporate risk.
• B) The proposed new project would increase the firm's market risk.
• C) The proposed new project would not affect the firm's risk at all.
• D) The proposed new project would have less stand-alone risk than the firm's typical project.
• E) The proposed new project would have more stand-alone risk than the firm's typical project.

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Definitions:

Participation Rate

The portion of earnings or benefits that an investor receives, often referring to the level of involvement in a profit-sharing arrangement or the extent to which individuals participate in a specific financial product or market.

Nominal Interest Rate

The interest rate stated on a loan or bond, not adjusted for inflation or other factors that affect the real value of interest earnings.

Inflation Rate

The percentage increase in the general level of prices for goods and services over a specific period, usually a year.

Real Interest Rate

The interest rate adjusted for inflation, representing the true cost of borrowing or the true yield on an investment.