3. Suppose your firm is going to finance a new investment project with only retained earnings. The manager claims that since the earnings are already being retained and that since no outside financing is required, the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk-free?
3. Suppose your firm is going to finance a new investment project with only retained earnings. The manager claims that since the earnings are already being retained and that since no outside financing is required, the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk-free?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![3. Suppose your firm is going to finance a new investment project with only retained earnings. The manager
claims that since the earnings are already being retained and that since no outside financing is required, the
project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk-free?
Why or why not? (3 marks)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F72e6a57e-60cf-498d-894f-6cf3cfd09a3e%2Fb0e2ed6b-5c1c-4f68-bc9e-238f12b85681%2Fcw044lo_processed.jpeg&w=3840&q=75)
Transcribed Image Text:3. Suppose your firm is going to finance a new investment project with only retained earnings. The manager
claims that since the earnings are already being retained and that since no outside financing is required, the
project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk-free?
Why or why not? (3 marks)
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