A Firm Is Considering the Purchase of an Asset Whose

question 11

Multiple Choice

A firm is considering the purchase of an asset whose stand-alone risk is greater than the average risk of its existing portfolio of assets. In evaluating this asset, the decision maker should:

• A)increase the internal rate of return (IRR) used to evaluate the asset to reflect its higher risk.
• B)increase the asset's net present value (NPV) to reflect its higher risk.
• C)reject the asset because its acceptance would clearly decrease the value of the firm.
• D)ignore the asset's higher risk if, after purchase, it will make up only a small fraction of the firm's total assets.
• E)increase the required rate of return that is used to evaluate the asset to reflect its higher risk.

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Definitions:

Corporation

A legal entity distinct from its owners, offering limited liability to its shareholders, and capable of owning assets, incurring debt, and conducting business.

Partnership

A formally established business entity where two or more counterparts participate in managing the firm and splitting the profits.

Proprietorship

A form of business organization where a single individual owns and operates the business.

Liabilities

Financial obligations or debts owed by a business to another entity, payable in money, goods, or services.