What Is the Best Approach to Take into Account the Relative

question 11

Multiple Choice

What is the best approach to take into account the relative risk of a proposed project?

• A)adjusting the discount rate upward if the project is judged to have above-average risk
• B)reducing the NPV by 10% for risky projects
• C)picking a risk factor equal to the average discount rate
• D)ignoring risk because project risk cannot be measured accurately

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Definitions:

Earnings Per Share

A financial metric that divides a company's profit available to shareholders by the outstanding shares, indicating the profitability on a per-share basis.

Required Rate Of Return

The minimum annual percentage of gain an investment must generate to be considered acceptable to an investor.

Non-Voting Common Stock

Shares that give the shareholder ownership rights in a company but do not grant voting power in corporate decisions.

Coattail Provision

A clause in a shareholder agreement protecting minority shareholders by enabling them to join in the sale of a company if a majority shareholder sells their stake.