If the Firm Is Being Operated So as to Maximize

question 192

Multiple Choice

If the firm is being operated so as to maximize shareholder wealth,and if our basic assumptions concerning the relationship between risk and return are true,then which of the following should be true?

• A) If the beta of the asset is larger than the firm's beta,then the required return on the asset is less than the required return on the firm.
• B) If the beta of the asset is smaller than the firm's beta,then the required return on the asset is greater than the required return on the firm.
• C) If the beta of the asset is greater than the corporate beta prior to the addition of that asset,then the corporate beta after the purchase of the asset will be smaller than the original corporate beta.
• D) If the beta of an asset is larger than the corporate beta prior to the addition of that asset,then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
• E) None of the above is a true statement.

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Definitions:

Specific Brand

A unique identification or name for a particular product that differentiates it from others within the same category.

Price Elasticity of Supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good, with elasticity differing across products.

Linear Demand Curve

A graphical representation of demand that shows a direct, constant relationship between price and quantity demanded.

Total Revenue

Total Revenue is the total income generated by a firm from selling its goods or services, calculated as the unit price multiplied by the quantity sold.