Currently,Powell Products Has a Beta of 1

question 48

Multiple Choice

Currently,Powell Products has a beta of 1.0,and its sales and profits are positively correlated with the overall economy.The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than one of the company's average projects.Also,the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong.On the basis of this information,which of the following statements is correct?

• A)The proposed new project would have more stand-alone risk than the firm's typical project.
• B)The proposed new project would increase the firm's corporate risk.
• C)The proposed new project would not affect the firm's risk at all.
• D)The proposed new project would have less stand-alone risk than the firm's typical project.

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Definitions:

Interest

The cost paid for borrowing money, typically expressed as an annual percentage rate.

Emergent Strategy

A strategy that unfolds in response to unexpected opportunities and challenges, rather than being planned from the start.

Environmental Changes

Alterations in the surrounding conditions including climate change, pollution, and natural habitat destruction that impact ecosystems and human societies.

Porter's Model

A framework created by Michael Porter that analyzes an industry's competitiveness and strategic business position through five forces: competition in the industry, potential of new entrants, power of suppliers, power of customers, and the threat of substitute products.