Currently,Powell Products Has a Beta of 1

question 72

Multiple Choice

Currently,Powell Products has a beta of 1.0,and its sales and profits are positively correlated with the overall economy.The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project.Also,the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong.On the basis of this information,which of the following statements is CORRECT?

• A) The proposed new project would have more stand-alone risk than the firm's typical project.
• B) The proposed new project would increase the firm's corporate risk.
• C) The proposed new project would increase the firm's market risk.
• D) The proposed new project would not affect the firm's risk at all.
• E) The proposed new project would have less stand-alone risk than the firm's typical project.

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Definitions:

Liquidation

The procedure of concluding a company's operations and allocating its resources among those who have claims.

Conservatism

An accounting principle that requires potential expenses and liabilities to be recognized immediately, but revenue only when it is ensured.

Chapter 7 Bankruptcy

A type of bankruptcy that involves the liquidation of a debtor's assets to repay creditors, under the U.S. Bankruptcy Code.

Free Assets

Assets that are not encumbered by any liens or claims, available to be used or sold freely by the owner.