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    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?

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    get 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? from EN Bilgi.

    Norris Enterprises, an all

    Answer to: Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer is evaluating a project with an expected return...

    Capital asset pricing model

    Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer is...

    Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer is... Question:

    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 an average project, in terms of both its beta risk and its total risk.

    Which of the following statements is correct?

    a. The project should definitely be accepted because its expected return (before any risk adjustments) is greater than its required return.

    b. The project should definitely be rejected because its expected return (before risk adjustment) is less than its required return.

    c. 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.

    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 rS, 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.

    Capital Budgeting:

    Capital budgeting includes evaluating projects based on the return that they provide after adjusting for the risk of the project. Capital Budgeting employs a number of tools to make a decision.

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    We need to calculate the average return of the firm using CAPM:

    E r = R f + β ( R m − R f ) Er=Rf+β(Rm−Rf)

    is the expected return

    is the risk...

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    Capital Asset Pricing Model (CAPM): Definition, Formula, Advantages & Example

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    What is the Capital Asset Pricing Model? Learn the definition and formula of CAPM, the assumptions that CAPM uses, and its importance in finance. Also, study examples and uses of CAPM.

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    Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

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    Increase the percentage of debt in the target capital structure

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    Schalheim Sisters Inc. has always paid out all of its earnings as dividends, hence the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WAAC?

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    The market risk premium declines

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    Terms in this set (14)

    Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

    Increase the percentage of debt in the target capital structure

    Schalheim Sisters Inc. has always paid out all of its earnings as dividends, hence the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WAAC?

    The market risk premium declines

    Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10%, Division B's cost is 14% and the corporate (composite) WACC is 112%. All of Division A's projects are equally risky, as are all of Division B's projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accepts?

    A Division A project with an 11% return

    LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below below-average risk projects have a WACC of 8%, and its avoe-average risk projects have a WACC of 12%. Which of the following projects (A,B, and C) should the company accepts.

    Project B, which is of below-average risk and has a return of 8.5%

    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 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?

    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 rs, then it should reject the project

    The MacMillen Company has equal amounts of low-risk, average-risk, and high-risk projects. The firm's overall WACC is 12%. The CFO believes that this is the correct WACC for the company's average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects. The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources. If the CEO's position is accepted, what is likely to happen over time?

    The company will take on too many high-risk projects and reject too many low-risk projects

    If a typical U.S. company correctly estimates WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely

    Become more risky and also have an increasing WACC. Its intrinsic value will not be maximized

    Which of the following statements is correct?

    If a company's tax rate increases but the YTM on its noncallable bonds remains the same, the after-tax cost of its debt will fall

    Which of the following statements is correct?

    When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation

    Which of the following statements is correct?

    Its cost of retained earnings is the rate of return stockholders require on a firm's common stock

    Which of the following is correct?

    There is an opportunity cost associated with using retained earnings, hence they are not "free"

    Which of the following is correct?

    If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline

    Which of the following statements is correct?

    The WACC that should be used in capital budgeting is the firm's marginal, after-tax cost of capital

    For a company whose target capital structure calls for 50% debt and 50% equity, which of the following statements is correct?

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    Norris Enterprises an all equity firm has a beta of 20 The chief financial

    Norris Enterprises an all equity firm has a beta of 20 The chief financial

    Norris enterprises an all equity firm has a beta of

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    43. Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer isevaluating a project with an expected return of 14%, before any risk adjustment. The risk-freerate is 5%, and the market risk premium is 4%. The project being evaluated is riskier than anaverage project, in terms of both its beta risk and its total risk. Which of the following statementsis CORRECT?a. The project should definitely be accepted because its expected return (before any riskadjustments) is greater than its required return.b. The project should definitely be rejected because its expected return (before risk adjustment) isless than its required return.c. Riskier-than-average projects should have their expected returns increased to reflect theirhigher risk. Clearly, this would make the project acceptable regardless of the amount of theadjustment.d. The accept/reject decision depends on the firm's risk-adjustment policy. If Norris' policy is toincrease the required return on a riskier-than-average project to 3% over rS, then it should rejectthe project.

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    Chapter 17 / Exercise 17-10

    Financial Accounting

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    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.(10-9) Risk-adjusted capital cost C I Answer: a MEDIUM44. The MacMillen Company has equal amounts of low-risk, average-risk, and high-riskprojects. The firm's overall WACC is 12%. The CFO believes that this is the correct WACC forthe company’s average-risk projects, but that a lower rate should be used for lower-risk projectsand a higher rate for higher-risk projects. The CEO disagrees, on the grounds that even thoughprojects have different risks, the WACC used to evaluate each project should be the samebecause the company obtains capital for all projects from the same sources. If the CEO’s positionis accepted, what is likely to happen over time?

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