Question

In: Finance

A firm is considering an investment in a risky project that offers a 10 percent rate...

A firm is considering an investment in a risky project that offers a 10 percent rate of return. Alternative investments with the same level of risk offer a 15% rate of return. If the company makes the investment, their value will:

Options

increase.

increase, and then decrease.

stay the same.

It cannot be determined what will happen to the firm value.

decrease.

Solutions

Expert Solution

The correct answer is It Cannot be determined what will happen to the firm value.

The Company is planning to make an investment in a risky project which is giving the return of 10% whereas the other project is giving 15 % return.

As per the details in the question, the WACC of company is not given. The acceptance of project depends on the WACC of the company.

If project giving more than the WACC it will add value otherwise it will decrease value.

So in this question it cannot be determined the impact of project on the company value.

jeff jeffy answered 2 years ago
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