A Firm Is Considering a New Project Whose Risk Is

question 48

Multiple Choice

A firm is considering a new project whose risk is greater than the risk of the firm's average project,based on all methods for assessing risk.In evaluating this project,it would be reasonable for management to do which of the following?

• A) Increase the estimated IRR of the project to reflect its greater risk.
• B) Increase the estimated NPV of the project to reflect its greater risk.
• C) Reject the project,since its acceptance would increase the firm's risk.
• D) Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
• E) Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.

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Definitions:

Foreign Bonds

Bonds issued in a domestic market by a foreign entity, in the domestic market's currency, as a method of securing capital from investors in that market.

International Bonds

Bonds issued in a country by a non-domestic entity, which can be denominated in the domestic or a foreign currency.

Exchange Rate

The rate at which one currency can be traded for another in the currency exchange market.

Constant Among Currencies

A concept or value that remains unchanged when compared across different currencies.