If the Firm Is Being Operated So as to Maximize

question 192

Multiple Choice

If the firm is being operated so as to maximize shareholder wealth,and if our basic assumptions concerning the relationship between risk and return are true,then which of the following should be true?

• A) If the beta of the asset is larger than the firm's beta,then the required return on the asset is less than the required return on the firm.
• B) If the beta of the asset is smaller than the firm's beta,then the required return on the asset is greater than the required return on the firm.
• C) If the beta of the asset is greater than the corporate beta prior to the addition of that asset,then the corporate beta after the purchase of the asset will be smaller than the original corporate beta.
• D) If the beta of an asset is larger than the corporate beta prior to the addition of that asset,then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
• E) None of the above is a true statement.

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Definitions:

Bond Market

The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market.

Small Business Owners

Individuals who own and operate a business that is smaller in scale compared to larger corporations or enterprises.

Debt Financing

The method of funding a company's operations or expansions by borrowing money, typically through issuing bonds or taking out loans.

Equity Financing

Raising capital through the sale of shares in a company.