Safeco Company and Risco Inc

question 35

Multiple Choice

Safeco Company and Risco Inc.are identical in size and capital structure.However,the riskiness of their assets and cash flows are somewhat different,resulting in Safeco having a WACC of 10% and Risco a 12% WACC.Safeco is considering Project X,which has an IRR of 10.5% and is of the same risk as a typical Safeco project.Risco is considering Project Y,which has an IRR of 11.5% and is of the same risk as a typical Risco project.Now assume that the two companies merge and form a new company,Safeco/Risco Inc.Moreover,the new company's market risk is an average of the pre-merger companies' market risks,and the merger has no impact on either the cash flows or the risks of Projects X and Y.Which of the following statements is correct?

• A)If the firm evaluates these projects and all other projects at the new overall corporate WACC, it will become riskier over time.
• B)If evaluated using the correct post-merger WACC, Project X would have a negative NPV.
• C)After the merger, Safeco/Risco would have a corporate WACC of 11%. Therefore, it should reject Project X but accept Project Y.
• D)Safeco/Risco's WACC, as a result of the merger, would be 10%.

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Definitions:

Tubular Secretion

The process by which substances are actively transported out of the blood and into the tubular fluid of the nephrons in the kidneys.

Urine Production

The physiological process by which kidneys filter blood to remove waste products and excess substances, resulting in the formation of urine.

Micturition Reflex

A reflex leading to the urge to urinate, initiated by the stretching of the bladder.

Urinary Bladder

A muscular sac in the pelvis that stores urine from the kidneys before it is excreted out of the body through urination.