Asked by Brisa Sanchez on Jun 18, 2024
Verified
In capital budgeting:
A) If a firm accepts projects without regard for risk, then the company can change its overall risk profile firm as perceived by investors.
B) Projects are thought to be incremental to the normal business of the firm.
C) Risk is important and should be included in the analysis but often isn't.
D) All of the above.
Risk Profile
An evaluation of an individual's or organization's willingness to take risks, as well as their financial ability to manage the impact of those risks.
Incremental
Describing something as increasing or adding on, often in small or gradual steps.
Risk Analysis
The process of identifying, assessing, and prioritizing risks followed by coordinated efforts to minimize, monitor, and control the probability or impact of unfortunate events.
- Grasp the necessity of risk modification in the allocation of capital budgets and the selection of proper discount rates.
- Associate the principle of risk aversion found in portfolio theory with capital budgeting choices.
Verified Answer
JD
Jerulyn DizonJun 25, 2024
Final Answer :
D
Explanation :
A) If a firm accepts projects without regard for risk, then the company can change its overall risk profile as perceived by investors, this means that the firm may take on projects that increase its risk beyond what investors are willing to accept, which can result in a drop in the stock price.
B) Projects are thought to be incremental to the normal business of the firm, meaning that they are separate and additional to the ongoing business activities of the firm.
C) Risk is important and should be included in the analysis, but often it is not considered. However, incorporating risk into the analysis is crucial as it can impact the overall profitability of a project.
B) Projects are thought to be incremental to the normal business of the firm, meaning that they are separate and additional to the ongoing business activities of the firm.
C) Risk is important and should be included in the analysis, but often it is not considered. However, incorporating risk into the analysis is crucial as it can impact the overall profitability of a project.
Learning Objectives
- Grasp the necessity of risk modification in the allocation of capital budgets and the selection of proper discount rates.
- Associate the principle of risk aversion found in portfolio theory with capital budgeting choices.