Which of the Following Statements Is CORRECT? Assume That the Firm

question 40

Multiple Choice

Which of the following statements is CORRECT? Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth.

• A) If a firm's managers want to maximize the value of their firm's stock, they should, in theory, concentrate on project risk as measured by the standard deviation of the project's expected future cash flows.
• B) If a firm evaluates all projects using the same cost of capital, and the CAPM is used to help determine that cost, then its risk as measured by beta will probably decline over time.
• C) Projects with above-average risk typically have higher than average expected returns.Therefore, to maximize a firm's intrinsic value, its managers should favor high-beta projects over those with lower betas.
• D) Project A has a standard deviation of expected returns of 20%, while Project B's standard deviation is only 10%.A's returns are negatively correlated with both the firm's other assets and the returns on most stocks in the economy, while B's returns are positively correlated.Therefore, Project A is less risky to a firm and should be evaluated with a lower cost of capital.
• E) If a firm has a beta that is less than 1.0, say 0.9, this would suggest that the expected returns on its assets are negatively correlated with the returns on most other firms' assets.

Recognize the importance and method of recording assets acquired through donation.

Understand the treatment of boot in nonmonetary exchanges.

Gain insights into the capitalization of costs related to self-constructed assets.

Grasp the concept of capitalized interest and its practical application.

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Definitions:

Real GDP Per Person

The inflation-adjusted value of goods and services produced per individual in a country.

Real GDP Per Person

A measure of the value of all finished goods and services produced within a country in a specific time period, adjusted for inflation, divided by the total population.

Productivity

The measure of efficiency in which goods and services are produced, typically reflected by the quantity produced per unit of input.

Annual Growth Rate

The year-over-year increase in the value of a particular economic indicator, expressed as a percentage.