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

question 4

Multiple Choice

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

• A)Yes; its expected return is greater than the firm's WACC.
• B)Yes; the project's risk-adjusted required return is less than its expected return.
• 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% above its expected return.
• E)No; the project's risk-adjusted required return is 1% above its expected return.

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Definitions:

Ménière's Disease

A disorder of the inner ear causing vertigo, ringing in the ear (tinnitus), and hearing loss.

Labyrinth Dysfunction

A disorder affecting the inner ear's complex system, leading to issues with balance and hearing.

Otosclerosis

A hearing loss condition caused by abnormal bone growth in the middle ear, hindering the ears’ ability to transmit sound.

Bilateral Hyperacusis

A condition characterized by an increased sensitivity to normal environmental sounds in both ears.