Assume You Are the Director of Capital Budgeting for an All-Equity

question 3

Multiple Choice

Assume you are the director of capital budgeting for an all-equity firm.The firm's current cost of equity is 18.00%;the risk-free rate is 0.25%;and the market risk premium is 7.00%.You are considering a new project that has 50.00% more beta risk than your firm's assets currently have,that is,its beta is 50.00% larger than the firm's existing beta.The expected return on the new project is 18.00%.Should the project be accepted if beta risk is the appropriate risk measure? Choose the correct statement.

• A) No;a 50.00% increase in beta risk gives a risk-adjusted required return of 24.00%.
• B) Yes;its expected return is greater than the firm's WACC.
• C) No;the project's risk-adjusted required return is 8.88% above its expected return.
• D) Yes;the project's risk-adjusted required return is less than its expected return.
• E) No;the project's risk-adjusted required return is 9.88% above its expected return.

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Definitions:

Reflective Judgment

The process of critically evaluating the validity of various claims and evidence before forming a conclusion.

Variety of Sources

Refers to obtaining information, materials, or data from multiple and diverse origins or points of origin.

Opinions

Personal views, judgments, or beliefs about a particular topic, which can vary widely between individuals.

Formal Reasoning

The ability to think logically and systematically about abstract concepts and hypothetical situations, typically developing during adolescence.