Louisiana Enterprises, an All-Equity Firm, Is Considering a New Capital

Multiple Choice

Louisiana Enterprises, an all-equity firm, is considering a new capital investment. Analysis has indicated that the proposed investment has a beta of 0.5 and will generate an expected return of 7%. The firm currently has a required return of 10.75% and a beta of 1.25. The investment, if undertaken, will double the firm's total assets. If rRF is 7% and the market risk premium is 3%, should the firm undertake the investment?

A) Yes; the expected return of the asset (7%) exceeds the required return (6.5%) .
B) Yes; the beta of the asset will reduce the risk of the firm.
C) No; the expected return of the asset (7%) is less than the required return (8.5%) .
D) No; the risk of the asset (beta) will increase the firm's beta.
E) No; the expected return of the asset is less than the firm's required return, which is 10.75%.