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:

Rate of Return

Returns or drawbacks experienced in an investment over an established period, articulated as a percentage of the investment's outlay.

Calculating

The process of determining a quantitative answer or figure through mathematical operations or procedures.

Benchmark Portfolio

A standard or reference by which the performance of a portfolio can be measured or judged.

Passive Strategy

An investment strategy involving minimal buying and selling actions, typically focused on long-term investment in index funds or Exchange-Traded Funds (ETFs).