solution

If Garcia does not risk-adjust its discount rate for specific ventures properly, which of the following is likely to occur over time? Check all that apply.

• The firm will accept too many relatively safe projects.
• The firm will become less valuable.
• The firm will accept too many relatively risky projects.
Generally, a positive correlation exists between a project’s returns and the returns on the firm’s other assets. If this correlation is_____, stand-alone risk will be a good proxy for within-firm risk.
Consider the case of another company. Kim Printing is evaluating two mutually exclusive projects. They both require a $3 million investment today and have expected NPVs of $600,000. Management conducted a full risk analysis of these two projects, and the results are shown below.
Risk Measure
-standard deviation of project’s expected NPV’s
– project beta
– correlation coffiecient of project cash flows
Project A —— Project B
$240,000——-$120,000
1.2—–_———-1.4
0.7—————-0.9
Which of the following statements about these projects’ risk is correct? Check all that apply.
– Project A has more market risk than Project B.
– Project A has more corporate risk than Project B.
– Project B has more market risk than Project A.
– Project A has more stand-alone risk than Project B.

 
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