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

question 1

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 0.50 and will generate an expected return of 5.00%.The firm currently has a required return of 10.75% and a beta of 1.25.The investment,if undertaken,will double the firm's total assets.If r_RF is 7.00% and the market risk premium is 3.00%,should the firm undertake the investment?

• A) Yes;the beta of the asset will reduce the risk of the firm.
• B) No;the expected return of the asset is less than the firm's required return,which is 10.75%.
• C) No;the expected return of the asset (5.00%)is less than the required return (8.50%).
• D) No;the risk of the asset (beta)will increase the firm's beta.
• E) Yes;the expected return of the asset (5.00%)exceeds the required return (4.50%).

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Definitions:

Metamorphosed Rocks

Rocks that have undergone a change in mineral composition and texture due to extreme heat and pressure conditions.

Wedge-Shaped Zone

A geological area characterized by its wedge or triangular shape, often indicating tectonic activity or sediment accrual at plate boundaries.

Accretionary Prism

A geological structure formed by the accumulation of sedimentary and oceanic plate material scraped off a subducting plate, typically found at convergent plate boundaries.

Metamorphosed Rocks

Rocks that have undergone a transformation in mineralogy, texture, or chemical composition due to exposure to high pressures and temperatures.