uurge R&lhg; Hsks that affect projects and the impact of risk consideration Yata

Question

uurge R&lhg; Hsks that affect projects and the impact of risk consideration Yata Net International has manufacturing, distribution, retail, and consulting divisions. Projects manufacturing and distribution divisions tand to be low-risk projects, have predictable demand. The company started its retail and consulting divisions within the last year, undertaken by the because these divisions are well established and company started its retail and consulting divisions within the last year, and it is ble. The company knew that opening these new divisions would be risky, but unknown if these divisions ill be profitable. The company knew that opening these new di its management believes the divisions have the p conditions. The company is currently using its WACC to evaluate new projects for all divisions nt believes the divisions have the potential to be extremely profitable under favorable market discount rate for specfic projects property, which of the following is If Yatta Net Intermational does not risk-adjust its discount rate for specific projects property, which of the following is likely to occur over time? Check all that apply. The firm's overall risk level will increase. The firm will increase in value. The firm could potentially reject projects that provide a higher rate of return than the company should require. How do managers typically deal with within-firm risk and beta risk when they are evaluating a potential project? O Quantitatively O Subjectively Consider the case of another company. Kim Printing is evaluating two mutually exdusive projects. They both require a $1 million investment today and have expected NPVs of $200,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Project A Project B 580,000 $120,000 Risk Measure Standard deviation of project's expected NPVs Project beta Correlation coefficient of project cash flows (relative to the firm's existing projects) 0.7 0.5 0.9 0.7 Which of the following statements about these projects' risk is correct? Check all that apply. Project A has more corporate risk than Project B Project B has more market risk than Project A. Project B has more stand-alone risk than Project A. Project B has more corporate risk than Project A.

Explanation / Answer

Answers:

1. If the firm does not risk adjust the discount rate used in evaluation of project, then the disocunt rate would ne higher and the net present value would come lower than actual. So the firm mat reject the project that wouuld have been accpeted if the risk adjusted rate was used.

2. While evalulting projects, managers consider Quantitative details for risks. Beta and stanndard devations.

3.

-. Standard deviation of Project A is lower , hence Project A has lower corporate risk. hence the statement given is incorrect.

- Beta of Project A is higer than that of B, hence Project A has higer market risk. Hence statement is correct.

- Standard deviation of Project B is higer , hence Project B has higer corporate risk. hence Statement is corect.

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