Assume You Are the Director of Capital Budgeting for an All-Equity

question 11

Multiple Choice

Assume you are the director of capital budgeting for an all-equity firm.The firm's current required rate of return is 16 percent;the risk-free rate is 10 percent;and the market risk premium is 5 percent.You are considering a new project that has 50 percent more beta risk than your firm's assets currently have,i.e. ,its beta is 50 percent larger than the firm's existing beta.The expected return (IRR) on the new project is 18 percent.Should the project be accepted if beta risk is the appropriate risk measure? Choose the most correct statement.

• A) Yes;its IRR is greater than the firm's required rate of return.
• B) Yes;the project's risk-adjusted required return is less than its IRR.
• C) No;a 50% increase in beta risk gives a risk-adjusted required return of 24%.
• D) No;the project's risk-adjusted required return is 2 percentage points above its IRR.
• E) No;the project's risk-adjusted required return is 1 percentage point above its IRR.

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