Which of the Following Statements Is CORRECT? Assume That the Firm

question 80

Multiple Choice

Which of the following statements is CORRECT? Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth.

• A) If a firm has a beta that is less than 1.0,say 0.9,this would suggest that the expected returns on its assets are negatively correlated with the returns on most other firms' assets.
• B) If a firm's managers want to maximize the value of the stock,they should,in theory,concentrate on project risk as measured by the standard deviation of the project's expected future cash flows.
• C) If a firm evaluates all projects using the same cost of capital,and the CAPM is used to help determine that cost,then its risk as measured by beta will probably decline over time.
• D) Projects with above-average risk typically have higher-than-average expected returns.Therefore,to maximize a firm's intrinsic value,its managers should favor high-beta projects over those with lower betas.
• E) Project A has a standard deviation of expected returns of 20%,while Project B's standard deviation is only 10%.A's returns are negatively correlated with both the firm's other assets and the returns on most stocks in the economy,while B's returns are positively correlated.Therefore,Project A is less risky to a firm and should be evaluated with a lower cost of capital.

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Definitions:

Perpetual Inventory System

An inventory management method that records the sale or purchase of inventory immediately through electronic tracking.

Gross Method

An accounting approach for recording purchases at the gross invoice amount before any trade discounts are taken.

Merchandising Transactions

Business activities related to the buying and selling of merchandise, which may involve inventory purchases, sales transactions, and the return of goods.

Journal Entries

Journal entries are the records of financial transactions in the accounting books, marking the initial step in the accounting cycle, detailing debits and credits.