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Finance 1 answer below » Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer is evaluating a project with an expected return of 14%, before any risk
adjustment. The risk-free rate is 5%, and the market risk premium is 4%. The project being evaluated is riskier than the firm’s average project, in terms of
both its beta risk and its total risk. Which of the following statements is CORRECT? View complete question » a. Riskier-than-average projects should have their expected returns increased
to reflect their higher risk. Clearly, this would make the project acceptable regardless of Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer is evaluating a project with an expected return of 14%, before any risk
adjustment. The risk-free rate is 5%, and the market risk premium is 4%. The project being evaluated is riskier than the firm’s average project, in terms of
both its beta risk and its total risk. Which of the following statements is CORRECT? a. Riskier-than-average projects should have their expected returns increased
to reflect their higher risk. Clearly, this would make the project acceptable regardless of the amount of the
adjustment. b. The project should definitely be accepted because its expected return
(before any risk adjustments) is greater than its required return. c. The project should definitely be rejected because its expected return
(before risk adjustment) is less than its required return. d. The accept/reject decision depends on the firm’s risk-adjustment policy. If
Norris’ policy is to increase the required return on a riskier-than-average project to 3% over r S , then it should reject
the project. e. Capital budgeting projects should be evaluated solely on the basis of their
total risk. Thus, insufficient information has been provided to make the accept/reject decision. Hide FeedbackShow
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Solution View less » Jan 17 2014 06:15 PM
