Question

Understanding risks that affect projects and the impact of risk consideration 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. I The firm could potentially reject projects that provide a higher rate of return than the company should require. The firm's overall risk level will increase. The firm will increase in value. How do managers typically deal with within-firm risk and beta risk when they are evaluating a potential project? Subjectively Quantitatively O Consider the case of another company. Turnkey Printing is evaluating two mutually exclusive projects. They both require a $5 million investment today and have expected NPVs of $1,000,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Risk Measure Project A Project B

Answer 1

If risk adjustment is not done then firm's overall risk will be high option b is correct

Option a is incorrect as it will accept riskier projects.
Option c is wrong as firm value will decrease.

Firms usually deal within firm risk and beta quantitatively.

Higher the standard deviation, higher is the standalone risk and higher the beta higher is the market risk and higher the correlation higher is the correlation coefficient of project cash flows.

Hence option a is correct Since standard Deviation of B is higher.
Option b is is incorrect because beta of B is less than Beta of A
Option c is correct because correlation of B is higher.
Option d is incorrect because A has less standard deviation as compared to B.