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Question
Suppose a firm's senior management is careful to make decisions that contribute to the goal of wealth maximization. If our basic assumptions about the relationship between risk and return are valid, which of the following statements is correct?
a. If the beta coefficient of a capital budgeting project is greater than the firm's beta coefficient, the required rate of return used to evaluate the project should be less than the firm's existing required rate of return.
b. If the beta coefficient of a capital budgeting project is less than the firm's beta coefficient, the required rate of return used to evaluate the project should be greater than the firm's existing required rate of return.
c. If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's beta coefficient will decrease if the project is purchased.
d. If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's required rate of return will increase if the project is purchased.
e. If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm should use required rate of return that is based on its existing beta coefficient to evaluate the project.
Answer
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