A project with the same level of risk as an all-equity firm should be accepted if the project's:

a. anticipated rate of return exceeds the firm's return on assets.

b. internal rate of return is positive given this level of risk.

c. expected rate of return exceeds the risk-free rate.

d. expected rate of return exceeds the market rate of return.

e. internal rate of return exceeds the firm's cost of equity capital.

Question

Business

Corey Hines

12 April, 20:42

A project with the same level of risk as an all-equity firm should be accepted if the project's:

a. anticipated rate of return exceeds the firm's return on assets.

b. internal rate of return is positive given this level of risk.

c. expected rate of return exceeds the risk-free rate.

d. expected rate of return exceeds the market rate of return.

e. internal rate of return exceeds the firm's cost of equity capital.

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Answers (1)

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Gage Waters · Answer 1

e. internal rate of return exceeds the firm's cost of equity capital.

Explanation:

The decision to accept or reject a project based on Internal rate of return (IRR) depends on whether its IRR is greater or less that the firm's cost of capital. You accept the project if the IRR > Cost of capital and reject the project if otherwise. In this case, the project will be accepted if the IRR is greater than the cost of equity since the risk of the project is of the same level as the firm's