Question 14 (1 point)

Nelson Enterprises, an all-equity firm, has a beta of 2.0. Nelsons chief financial officer is evaluating a project with an expected return of 21%, before any risk adjustment. The risk-free rate is 7%, and the market risk premium is 6%. The project being evaluated is riskier than Nelsons average project, in terms of both its beta risk and its total risk. Which of the following statements is correct?

Question 14 options:

	Riskier-than-average projects should have their expected returns increased to reflect their higher risk. Clearly, this would make the project acceptable regardless of the amount of the adjustment.
	The accept/reject decision depends on the firms risk-adjustment policy. If Nelsons policy is to increase the required return on a riskier-than-average project to 3% over rS, then it should reject the project.
	The project should definitely be accepted because its expected return (before any risk adjustments) is greater than its required return.
	The project should definitely be rejected because its expected return (before risk adjustmenT) is less than its required return.