Yatta Net International has manufacturing, distribution, retail, and consulting divisions. Projects undertaken by the manufacturing and distribution...

90.2K

Verified Solution

Question

Finance

Yatta Net International has manufacturing, distribution, retail,and consulting divisions. Projects undertaken by the manufacturingand distribution divisions tend to be low-risk projects, becausethese divisions are well established and have predictable demand.The company started its retail and consulting divisions within thelast year, and it is unknown if these divisions will be profitable.The company knew that opening these new divisions would be risky,but its management believes the divisions have the potential to beextremely profitable under favorable market conditions. The companyis currently using its WACC to evaluate new projects for alldivisions.
If Yatta Net International does not risk-adjust its discountrate for specific projects properly, which of the following islikely to occur over time? Check all that apply.
* The firm will reject too many relatively safe projects.
* The firm will make poor capital budgeting decisions that couldjeopardize the long-run viability of the company.
* The firm will become less risky.
Generally, a positive correlation exists between a project’sreturns and the returns on the firm’s other assets. If thiscorrelation is _____ (low, high) , stand-alone risk will be a goodproxy for within-firm risk.
Consider the case of another company. Chrome Printing isevaluating two mutually exclusive projects. They both require a $3million 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.
Consider the case of another company. Chrome Printing isevaluating two mutually exclusive projects. They both require a $3million 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
Project A
Project B
Standard deviation of project’s expected NPVs $240,000 $360,000
Project beta 1.2 1.4
Correlation coefficient of project cash flows (relative to thefirm’s existing projects) 0.7 0.9
Which of the following statements about these projects’ risk iscorrect? Check all that apply.
* Project B has more stand-alone risk than Project A.
* Project B has more market risk than Project A.
* Project A has more stand-alone risk than Project B.
* Project B has more corporate risk than Project A.

Risk Measure	Project A	Project B
Standard deviation of project’s expected NPVs	$240,000	$360,000
Project beta	1.2	1.4
Correlation coefficient of project cash flows (relative to thefirm’s existing projects)	0.7	0.9

Answer & Explanation Solved by verified expert

4.0 Ratings (430 Votes)

SEE THE See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Yatta Net International has manufacturing, distribution, retail,and consulting divisions. Projects undertaken by the manufacturingand distribution divisions tend to be low-risk projects, becausethese divisions are well established and have predictable demand.The company started its retail and consulting divisions within thelast year, and it is unknown if these divisions will be profitable.The company knew that opening these new divisions would be risky,but its management believes the divisions have the potential to beextremely profitable under favorable market conditions. The companyis currently using its WACC to evaluate new projects for alldivisions.If Yatta Net International does not risk-adjust its discountrate for specific projects properly, which of the following islikely to occur over time? Check all that apply.* The firm will reject too many relatively safe projects.* The firm will make poor capital budgeting decisions that couldjeopardize the long-run viability of the company.* The firm will become less risky.Generally, a positive correlation exists between a project’sreturns and the returns on the firm’s other assets. If thiscorrelation is _____ (low, high) , stand-alone risk will be a goodproxy for within-firm risk.Consider the case of another company. Chrome Printing isevaluating two mutually exclusive projects. They both require a $3million 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.Consider the case of another company. Chrome Printing isevaluating two mutually exclusive projects. They both require a $3million 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 MeasureProject AProject BStandard deviation of project’s expected NPVs$240,000$360,000Project beta1.21.4Correlation coefficient of project cash flows (relative to thefirm’s existing projects)0.70.9Which of the following statements about these projects’ risk iscorrect? Check all that apply.* Project B has more stand-alone risk than Project A.* Project B has more market risk than Project A.* Project A has more stand-alone risk than Project B.* Project B has more corporate risk than Project A.