Table 12.2 A Firm Is Considering Investment in a Capital Project Which

Multiple Choice

Table 12.2
A firm is considering investment in a capital project which is described below. The firm's cost of capital is 18 percent and the risk-free rate is 6 percent. The project has a risk index of 1.5. The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital - Rf)
-It has been found that the value of the stock of corporations whose shares are traded publicly in an efficient marketplace is

A) generally positively affected by diversification, because of the reduction in risk.
B) generally negatively affected by diversification, because of the increase in risk.
C) generally not affected by diversification, unless greater returns are expected.
D) generally negatively affected by diversification, because of the increase in the required rate of return.