Diversified Industries Is a Multi-Product Firm Operating in a Number

question 27

Multiple Choice

Diversified Industries is a multi-product firm operating in a number of industries.Assume the firm is analyzing a new project that has risks unrelated to those of the current firm's product.When computing the net present value of the new project the cash flows should be discounted using:

• A)a rate based on a beta of one since the firm is well diversified.
• B)a rate based on the firm's current beta.
• C)the risk-free rate of return.
• D)the market rate of return.
• E)a rate commensurate with the risk level of the project.

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Definitions:

Methods/Procedure

Established and systematic ways of doing something, involving steps or actions taken to achieve a particular end.

Interviewing

The process of asking questions and receiving answers from participants, typically used in job selection, research, or journalism.

Catastrophe

A large-scale disaster, misfortune, or failure.

Spinning-Wheels

Mechanical devices used for spinning thread or yarn from natural or synthetic fibers.