Assume you are the director of capital budgeting for an all-equity firm. The firm's current cost of equity is 17.50%; the risk-free rate is 0.25%; and the market risk premium is 7%. You are considering a new project that has 50.00% more beta risk than your firm's assets currently have, that is, its beta is 50.00% larger than the firm's existing beta. The expected return on the new project is 18.00%. Should the project be accepted if beta risk is the appropriate risk measure? Choose the correct statement.
A. No; a 50.00% increase in beta risk gives a risk-adjusted required return of 24.00%.
B. Yes; its expected return is greater than the firm's WACC.
C. No; the project's risk-adjusted required return is 8.13% above its expected return.
D. Yes; the project's risk-adjusted required return is less than its expected return.
E. No; the project's risk-adjusted required return is 9.13% above its expected return.
Answer: C
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