Foundations Of Financial Management
17th Edition
ISBN: 9781260013917
Author: BLOCK, Stanley B., HIRT, Geoffrey A., Danielsen, Bartley R.
Publisher: Mcgraw-hill Education,
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Chapter 13, Problem 6DQ
Assume a company, correlated with the economy, is evaluating six projects, of which two are positively correlated with the economy, two are negatively correlated, and two are not correlated with it at all. Which two projects would it select to minimize the company’s overall risk? (LO13-5)
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How do I determine which is the correct answer for this problem? A company estimates that an average-risk project has a WACC of 10 percent, a below-average-risk project has a WACC of 8 percent, and an above-average-risk project has a WACC of 12 percent. Which of the following independent projects should the company accept? a. Project A has average risk and an IRR = 9 percent. b. Project B has below-average risk and an IRR = 8.5 percent. c. Project C has above-average risk and an IRR = 11 percent. d. All of the projects above should be accepted. e. None of the projects above should be accepted.
Please answer fast I give you upvote.
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A company estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?
A) Project C, which is of above-average risk and has a return of 11%.
B) All of the projects should be accepted.
C)Project A, which is of average risk and has a return of 9%.
D)None of the projects should be accepted.
E)Project B, which is of below-average risk and has a return of 8.5%.
Chapter 13 Solutions
Foundations Of Financial Management
Ch. 13 - Prob. 1DQCh. 13 - Discuss the concept of risk and how it might be...Ch. 13 - When is the coefficient of variation a better...Ch. 13 - Explain how the concept of risk can be...Ch. 13 - If risk is to be analyzed in a qualitative way,...Ch. 13 - Assume a company, correlated with the economy, is...Ch. 13 - Assume a firm has several hundred possible...Ch. 13 - Explain the effect of the risk-return trade-off on...Ch. 13 - What is the purpose of using simulation analysis?...Ch. 13 - Assume you are risk-averse and have the following...
Ch. 13 - Myers Business Systems is evaluating the...Ch. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Possible outcomes for three investment...Ch. 13 - Prob. 7PCh. 13 - Prob. 8PCh. 13 - Prob. 9PCh. 13 - Prob. 10PCh. 13 - Prob. 12PCh. 13 - Waste Industries is evaluating a 70,000 project...Ch. 13 - Prob. 14PCh. 13 - Debby’s Dance Studios is considering the...Ch. 13 - Prob. 17PCh. 13 - Prob. 18PCh. 13 - Allison’s Dresswear Manufacturers is preparing a...Ch. 13 - Prob. 20PCh. 13 - Prob. 21PCh. 13 - Prob. 22PCh. 13 - Ms. Sharp is looking at a number of different...Ch. 13 - Prob. 25P
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- Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects? A. Without information about the projects' NPVs we cannot determine which project(s) should be accepted. B. Project C, which has above-average risk and an IRR = 11%. C. Project A, which has average risk and an IRR = 9%. D. Project B, which has below-average risk and an IRR = 8.5%. E. All of these projects should be accepted.arrow_forward!arrow_forwardA firm has two potential investment projects. The project information is summarised in the table below. Project A $670 Project B $700 Expected value of profit Standard deviation of profit Coefficient of variation of profit 175 370 0.26 0.53 Which project has a lower absolute risk level? Which project has a lower relative risk level? Which project would you advise the firm to choose? Explain your answers. ---- --- ---- ..- ---arrow_forward
- Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects? Group of answer choices Project A, which has average risk and an IRR = 9%. Project C, which has above-average risk and an IRR = 11%. Project B, which has below-average risk and an IRR = 8.5%. All of these projects should be accepted. Without information about the projects' NPVs we cannot determine which project(s) should be accepted.arrow_forwardAs the CFO of Yo co., you are considering three projects with different levels of risks. You estimate that its below-average risk projects have a WACC of 7%, its average-risk projects have a WACC of 10%, and its above-average risk projects have a WACC of 13%. Which of the following projects should you accept? a. Project A, which is of below-average risk and has a return of 8%. B. Project B, which is of average risk and has a return of 9.5%. C.Project C, which is of above-average risk and has a return of 12%. D. None of the projects should be accepted. E. All of the projects should be accepted.arrow_forwardA firm which uses its WACC for average-risk projects adds and subtracts 3 percentage points for above-average and below-average risk projects, respectively. If its WACC is 8%, which of the following projects should be accepted and why? Project 1: E(r)= 9%; Riskiness: Average; Project 2: E(r)= 9% ; Riskiness: Above Average; Project 3: E(r)= 11%; Riskiness: Average; Project 4: E(r)= 5%; Riskiness: Below Average; Project 5: E(r)= 8%; Riskiness: Below Average; Project 6: E(r)= 10%; Riskiness: Above Average; O A. Project 3 O B. Project 1 OC. Project 5 O D. Project 6arrow_forward
- Consider the following figure. If firm A were to use the average or composite WACC it would Rate of Return 13.0 (5) 11.0 10.0 90 Project L 70 70 Division L's WACC О Riskov Division H's WACC WACC Project H Composite WACC Firm A Risk Riskov O accept Project L and reject Project H O be making the right decisions on acceptance or rejection of both projects O accept both Project L and Project H O reject both Project L and Project H O accept Project H and reject Project Larrow_forwardA company estimates that an average-risk project has a WACC of 10 percent, a below-average risk project has a WACC of 8 percent, and an above-average risk project has a WACC of 12 percent. Which of the following independent projects should the company accept? Project A has average risk and an IRR = 9 percent. Project B has below-average risk and an IRR = 8.5 percent. Project C has above-average risk and an IRR = 11 percent. None of the abovearrow_forwardAn investor is consider four different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below. Economic Condition Investment Poor Average Good Excellent (S1) (S2) (S3) (S4) A 50 75 20 30 B 80 15 40 50 C -100 300 -50 10 D 25 25 25 25 What decision would be made under minimax regret?arrow_forward
- H1. Accountarrow_forwardWhat Suppose your organization is deciding which of four projects to bid on. Information on each is in the table below. Assume that all up-front investments are not recovered, so they are shown as negative profits. Draw a diagram and calculate the EMV for each project. Write a few paragraphs explaining which projects you would bid on. Be sure to use the EMV information and your personal risk tolerance to justify your answerarrow_forwardPlease DON'T use excel in solving this question.arrow_forward
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