Louisiana Enterprises,an All-Equity Firm,is Considering a New Capital Investment

question 78

Multiple Choice

Louisiana Enterprises,an all-equity firm,is considering a new capital investment.Analysis has indicated that the proposed investment has a beta of 0.5 and will generate an expected return of 7 percent.The firm currently has a required return of 10.75 percent and a beta of 1.25.The investment,if undertaken,will double the firm's total assets.If r_RF = 7 percent and the market return is 10 percent,should the firm undertake the investment? (Choose the best answer. )

• A) Yes;the expected return of the asset (7%)exceeds the required return (6.5%).
• B) Yes;the beta of the asset will reduce the risk of the firm.
• C) No;the expected return of the asset (7%)is less than the required return (8.5%).
• D) No;the risk of the asset (beta)will increase the firm's beta.
• E) No;the expected return of the asset is less than the firm's required return,which is 10.75%.