Carolina Insurance Company,an All-Equity Life Insurance Firm,is Considering the Purchase

question 29

Multiple Choice

Carolina Insurance Company,an all-equity life insurance firm,is considering the purchase of a fire insurance company.If the purchase is made,Carolina will be 50 percent larger than before.Currently,Carolina's stock has a beta of 1.2 and the return required is 15.2 percent.The fire insurance company is expected to generate a return of 20 percent with a beta of 2.5.If the risk-free rate is 8 percent and the market risk premium is 6 percent,should Carolina make the investment?

• A) No;the expected return is less than the required return.
• B) No;the IRR is less than the appropriate required rate of return.
• C) Yes;the IRR is greater than the appropriate required rate of return.
• D) Yes;the expected return is greater than the required return.
• E) Yes;the project's risk/return combination lies above the SML.

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Definitions:

Appendix Section

An appendix section is a part of a document located at the end where supplementary material like charts, tables, or references are provided for further reference.

Business Plan

A formal document detailing the goals, strategies, financial forecasts, and operational structure of a business.

Customer Segments

Customer Segments refer to the practice of dividing a company's target market into distinct groups of customers that share similar characteristics, to tailor marketing strategies and products to meet their specific needs.

Small Business Owner

An individual who owns and operates a company that is typically characterized by a small number of employees and relatively low volume of sales.