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:

Sole Proprietorship

A business owned and operated by one individual, where there is no legal distinction between the owner and the business entity.

Sole Proprietorship

A type of enterprise that is owned and operated by one person, with no legal distinction between the owner and the business entity.

Corporation

A legal entity established by individuals, stockholders, or shareholders, with separate legal rights and liabilities distinct from those of its owners, used to conduct business.

General Partner

A member of a partnership who has unlimited liability and is responsible for the management of the partnership.