A Firm Is Considering a New Project Whose Risk Is

question 51

Multiple Choice

A firm is considering a new project whose risk is greater than the risk of the firm's average project,based on all methods for assessing risk.In evaluating this project,what would it be reasonable for management to do?

• A)increase the estimated IRR of the project to reflect its greater risk
• B)reject the project, since its acceptance would increase the firm's risk
• C)ignore the risk differential if the project would amount to only a small fraction of the firm's total assets
• D)increase the cost of capital used to evaluate the project to reflect the project's higher-than-average risk

---

Definitions:

General Motors

A global American corporation with its main office in Detroit, specializing in the design, production, marketing, and sales of automobiles and their components.

Sears

An American chain of department stores known for its significant historical impact on retail but has struggled financially in recent years.

Sustainable Growth Rate (SGR)

The growth rate a firm can maintain given its debt capacity, ROE, and retention ratio.

Finance Perspective

An approach or viewpoint focusing on the management, creation, and study of money, banking, credit, investments, assets, and liabilities.