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 could potentially reject projects that provide a higher rate of return than the company should require. The firm will increase in value. The firm's overall risk level will increase. stand- Generally, a positive correlation exists between a project's returns and the returns on the firm's other assets. If this correlation is alone risk will be a good proxy for within-firm risk. high Consider the case of another company. Davis Printing is evaluating two mutually exclusive projects. They both require a $1 millior low nent today and have expected NPVs of $200,000. Management conducted a full risk analysis of these two projects, and the results are showrlwerow. Risk Measure Project A Project B Standard deviation of project's expected NPVs Project beta $80,000 0.9 0.7 $40,000 1.1 0.5 Correlation coefficient of project cash flows (relative to the firm's existing projects) Which of the following statements about these projects' risk is correct? Check all that apply. Project B has more corporate risk than Project A. Project B has more market risk than Project A. Project B has more stand-alone risk than Project A. O Project A has more stand-alone risk than Project B.

Answer 1

If Garcia doesnot risk adjust discount
then option c the firm's overall risk increases.

If this risk is low standalone risk will be a good proxy for within firm risk

Option a is false because correlation of B is less than A.
Option b is true because beta of B is more than
Option c is false because correlation of B is less than A
Option d is true