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

question 80

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 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.
• B) If a firm's managers want to maximize the value of the stock,they should,in theory,concentrate on project risk as measured by the standard deviation of the project's expected future cash flows.
• C) 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.
• D) 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.
• E) 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.

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Definitions:

Labor Demand Curve

A graphical representation that shows the relationship between the quantity of labor demanded by firms and the wage rate.

Competitive Market

A market structure characterized by a large number of buyers and sellers, free entry and exit, and a homogeneous product.

Marginal Product

The extra output generated from adding a single unit of a specific input, with all other inputs remaining unchanged.

Market Wage

Market wage is the prevailing rate of pay for a specific job in the labor market, determined by the supply and demand for labor specific to that job.