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Distinguish between beta(i.e market) risk, within-firm( i.e,corporate) risk, and stand-alone risk for a potential project. Of the three measures, which is theoretically the most relevant, and why? Suppose a firm estimates its overall cost of capital for the coming year to be 10%. What might be reasonable costs of capital for average-risk, high-risk, and low-risk project?

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Trinidad Tremblay
Trinidad TremblayLv2
29 Sep 2019

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Suppose a firm estimates it's overall cost of capital for the coming year to be 10%. What might be a reasonable costs of capital for average-risk, high-risk, and low-risk projects?

7. Within-firm risk and beta risk Aa Aa Understanding risks that affect projects and the impact of risk consideration wSp Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company's projects tends to vary a great deal from project to project. Ir WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply The firm will become less risky. The firm will make poor capital budgeting decisions that could jeopardize the long-run viability of the company The firm will reject too many relatively safe projects. Generally, a positive correlation exists between a project's returns and the returns on the firm's other assets. If this correlation is, stand-alone risk will be a good proxy for within-firm risk. high low Consider the case of another company. Davis Printing is evaluating two mutually exclusive projects. They both require a $5 million investment today and have expected NPVs of $1,000,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Risk Measure Standard deviation of project's expected Npvs Project beta Project A Project B $400,000 $600,000 1.2 Correlation coefficient of project cash flows (relative to the firm's existing projects) 0.7 1.0 0.9 Which of the following statements about these projects risk is correct? Check all that apply

Please guys answer all the questions. I have to turn this in 6 hours. Thanks in Advance.

1)A firm should never undertake an investment if accepting it would increase the firm’s cost of capital.

A)True

B)False

2)If a investment under consideration has beta of zero, its purchase will not affect the firm’s market risk.

A)True

B)Fase

3) A particular project might have highly volatile forecasted cash flows, yet not have high market risk.

A)True

B)False

4)If a firm is considering purchasing an asset (with normal cash flows) whose beta is greater than the current beta of the firm, it should evaluate it using a discount rate greater than the firm’s current cost of capital.

A)True

B)False

5)If a company uses the same discount rate to evaluate all projects,

A)it will become riskier over time, and its value will decline.

B)it will become riskier over time, and its value will rise.

C)it will become less risky over time, and its value will rise.

D)it will become less risky over time, and its value will decline.

E)there is no reason to expect its risk position or value to change.

6)Tropicali’s overall average cost of capital is 10%. Its frozen foods division is riskier than the firm as a whole, its fresh produce division has risk similar to the firm’s, and its institutional foods division has less risk. Tropicali adjusts for both divisional and project risk by adding/subtracting 2 percentage points to/from its corporate cost of capital. The hurdle rate for a low-risk project in the frozen foods division is:

a. 6%.

b. 8%.

c. 10%.

d. 12%.

e. 14%.


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