Using the Security Market Line Concept in Capital Budgeting,which of the Following

question 1

Multiple Choice

Using the Security Market Line concept in capital budgeting,which of the following statements is CORRECT?

• A)If the expected rate of return on a given capital project lies above the SML, the project should be accepted even if its beta is greater than the beta of the firm's average project.
• B)If a project's return lies below the SML, it should be rejected if it has a beta greater than the firm's existing beta but accepted if its beta is below the firm's beta.
• C)If two mutually exclusive projects' expected returns are both above the SML, the project with the lower risk should be accepted.
• D)If a project's expected rate of return is greater than the expected rate of return on an average project, it should be accepted.
• E)None of the statements is correct.

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Definitions:

Gross Profit

Gross profit refers to the difference between revenue and the cost of goods sold before administrative, overhead, and other expenses.

Receivables Turnover Ratio

A financial metric that measures a company's effectiveness in extending credit and collecting debts, calculated by dividing net credit sales by the average accounts receivable.

Net Sales

The amount of sales revenue remaining after deducting returns, allowances for damaged or missing goods, and discounts.

Accounts Receivable

Funds that customers owe to a business for products or services that have been received but remain unpaid.