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:

Influencing Others

Influencing others involves affecting the behavior, attitudes, or perceptions of others through various means, whether direct or indirect.

Personal Goals

Individual objectives or aspirations that one aims to achieve, which can be personal, professional, or educational.

Authoritarianism

A tendency to adhere rigidly to conventional values and to obey recognized authority.

Machiavellianism

A personality trait that involves manipulation and exploitation of others, a cynical disregard for morality, and a focus on self-interest and deception.