Assume You Are the Director of Capital Budgeting for an All-Equity

Multiple Choice

Assume you are the director of capital budgeting for an all-equity firm.The firm's current cost of equity is 16%; the risk-free rate is 10%; and the market risk premium is 5%.You are considering a new project that has 50% more beta risk than your firm's assets currently have,that is,its beta is 50% larger than the firm's existing beta.The expected return on the new project is 18%.Should the project be accepted if beta risk is the appropriate risk measure? Choose the correct statement.

A) Yes; its expected return is greater than the firm's WACC.
B) Yes; the project's risk-adjusted required return is less than its expected return.
C) No; a 50% increase in beta risk gives a risk-adjusted required return of 24%.
D) No; the project's risk-adjusted required return is 2% above its expected return.
E) No; the project's risk-adjusted required return is 1% above its expected return.