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28 May, 23:31

Suppose that two firms, A and B, are considering the same project. The project is in the same risk class as firm A's overall operations. The project has an IRR of 13.0 percent. Firm A has a beta of 1.2, while firm B's beta is 0.9. The risk-free rate is 4.5 percent and the market risk premium is 7.0 percent. Which firm (s) should accept the project? A) firm A onlyB) firm B onlyC) both firms A and BD) neither firm A nor BE) The answer cannot be determined without more information.

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  1. 29 May, 00:39
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    Firm A should accept the project beacause it has high required rate of return which means low risk involved.

    Explanation:

    Rate of return = risk free return + Beta (market risk premium)

    Firm A

    rate of return = 0.045 + 1.2 (0.07)

    = 0.045 + 0.084

    = 12.9%

    Firm B;

    rate of return = 0.045 + 0.9 (0.07)

    = 0.045 + 0.063

    = 10.8%
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