Question

Garcia Real Estate is involved in commercial real estate ventures throughout the United States. Some of these ventures are much riskier than other ventures because of market conditions in different regions of the country. 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 risky projects. The firm will accept too many relatively safe projects. The firm will become less valuable. 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. Davis 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 NPVs Project beta Correlation coefficient of project cash flows (relative to the firm's existing projects) Project A Project B $240,000 $360,000 1.2 1.0 0.6 0.4

Answer 1

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Home nert Page Layout Reterences Mallings Review ew as cut Find- Change Select Editing Copy Replace B l y * x.*. a- ツ, ▲ . E : t-, h , E , Paste n Normal n No Spaci Heading 1 Heading 2 Title Subtitle Subtle En Format Painter t Clipboard Font Paragraph Styles 13 15 18 21 CHECK ALL THAT APPLY THE FIRM WILL ACCEPT TOO MANY RELATIVELY RISKY PROJECTS THE FIRM WILL BECOME LESS VALUABLE FILL IN THE BLANK IF THIS CORRELATION IS HIGH Project B has more stand-alone risk than Project A Project A has more corporate risk than project B Standard deviation measures stand alone risk. So project B has more standalone risk then project A. Similarly beta of Project A is higher than Project B. Beta measures market risk. Same way Project A has higher correlation coefficient than Project B which measures corporate risk. So Project A has higher market risk & corporate risk than Project B Pa rds: 2,957 | English 0ndia) | 04:54