Wansley Enterprises Is Considering a New Project

question 18

Multiple Choice

Wansley Enterprises is considering a new project. The company has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that the proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT?

• A) the proposed new project would increase the firm's corporate risk.
• B) the proposed new project would increase the firm's market risk.
• C) the proposed new project would not affect the firm's risk at all.
• D) the proposed new project would have less stand-alone risk than the firm's typical project.
• E) the proposed new project would have more stand-alone risk than the firm's typical project.

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Definitions:

Downward-sloping Market Demand Curve

This concept depicts the inverse relationship between price and quantity demanded in a market, indicating that higher prices typically lead to lower quantities demanded, and vice versa.

Marginal Revenue

The additional income received from selling one more unit of a good or service; it's a critical concept in business and economics for understanding how to maximize profit.

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, resulting in the cost per unit of production decreasing with increasing scale.

Average Total Cost Curve

Illustrates the average cost per unit of output, combining both fixed and variable costs, at different levels of production.