Bloom and Co. has no debt or preferred stock ⎯ it is an all-equity firm ⎯ and has a beta of 2.0. The CFO is evaluating a project with an expected return of 14%, before any risk adjustment. The current WACC of the company is 13%. 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? Why? The project should definitely be accepted because its expected return (before any risk adjustments) is greater than its required return. 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. The accept/reject decision depends on the firm's risk-adjustment policy. If Weatherall's policy is to increase the required return on a riskier-than-average project to 3% over rS, then it should reject the project.

Bloom and Co. has no debt or preferred stock ⎯ it is an all-equity firm ⎯ and has a beta of 2.0. The CFO is evaluating a project with an expected return of 14%, before any risk adjustment. The current WACC of the company is 13%. 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? Why? The project should definitely be accepted because its expected return (before any risk adjustments) is greater than its required return. 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. The accept/reject decision depends on the firm's risk-adjustment policy. If Weatherall's policy is to increase the required return on a riskier-than-average project to 3% over rS, then it should reject the project.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

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