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. If 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 increase in value. The firm’s overall risk level will increase. The firm could potentially reject projects that provide a higher rate of return than the company should require. When a project involves an entirely new product line, the firm may be able to obtain betas from to calculate a weighted average cost of capital (WACC) for its new product line. Consider the case of another company. Chrome Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVs of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Risk Measure Project A Project B Standard deviation of project’s expected NPVs $80,000 $40,000 Project beta 0.9 1.1 Correlation coefficient of project cash flows (relative to the firm’s existing projects) 0.7 0.9 Which of the following statements about these projects’ risk is correct? Check all that apply. Project B has more stand-alone risk than Project A. Project B has more corporate risk than Project A. Project A has more market risk than Project B. Project A has more stand-alone risk than Project B.
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. If 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 increase in value. The firm’s overall risk level will increase. The firm could potentially reject projects that provide a higher rate of return than the company should require. When a project involves an entirely new product line, the firm may be able to obtain betas from to calculate a weighted average cost of capital (WACC) for its new product line. Consider the case of another company. Chrome Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVs of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Risk Measure Project A Project B Standard deviation of project’s expected NPVs $80,000 $40,000 Project beta 0.9 1.1 Correlation coefficient of project cash flows (relative to the firm’s existing projects) 0.7 0.9 Which of the following statements about these projects’ risk is correct? Check all that apply. Project B has more stand-alone risk than Project A. Project B has more corporate risk than Project A. Project A has more market risk than Project B. Project A has more stand-alone risk than Project B.
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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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.
If 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 increase in value.
The firm’s overall risk level will increase.
The firm could potentially reject projects that provide a higher rate of return than the company should require.
When a project involves an entirely new product line, the firm may be able to obtain betas from to calculate a weighted average cost of capital (WACC) for its new product line.
Consider the case of another company. Chrome Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVs of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below.
|
Risk Measure
|
Project A
|
Project B
|
|---|---|---|
| Standard deviation of project’s expected NPVs | $80,000 | $40,000 |
| Project beta | 0.9 | 1.1 |
| Correlation coefficient of project cash flows (relative to the firm’s existing projects) | 0.7 | 0.9 |
Which of the following statements about these projects’ risk is correct? Check all that apply.
Project B has more stand-alone risk than Project A.
Project B has more corporate risk than Project A.
Project A has more market risk than Project B.
Project A has more stand-alone risk than Project B.
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