Carolina Insurance Company,an All-Equity Life Insurance Firm,is Considering the Purchase

question 29

Multiple Choice

Carolina Insurance Company,an all-equity life insurance firm,is considering the purchase of a fire insurance company.If the purchase is made,Carolina will be 50 percent larger than before.Currently,Carolina's stock has a beta of 1.2 and the return required is 15.2 percent.The fire insurance company is expected to generate a return of 20 percent with a beta of 2.5.If the risk-free rate is 8 percent and the market risk premium is 6 percent,should Carolina make the investment?

• A) No;the expected return is less than the required return.
• B) No;the IRR is less than the appropriate required rate of return.
• C) Yes;the IRR is greater than the appropriate required rate of return.
• D) Yes;the expected return is greater than the required return.
• E) Yes;the project's risk/return combination lies above the SML.

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Definitions:

Computational Thinking

A thought process involved in formulating problems and their solutions in a way that a computer can effectively carry out.

Data-Based Decisions

Making choices or conclusions based on the analysis and interpretation of numerical or structured information.

Internal-operational Communication

Communication that occurs within an organization, focusing on its operations, procedures, and updates.

External-operational Communication

Communication that occurs between a business and external parties, such as customers or partners, focusing on operational subjects.