Question 4 (2 points) Coastal Energy Ltd., an all-equity firm, has a beta of 1.5. As its head of capital budgeting you are evaluating a project with an expected return of 14%, before any risk adjustment. The risk-free rate is 4%, and the market risk premium is 6%. The project you are evaluating is riskier than Coastal Energy's average project. As an all-equity firm, its WACC is equal to its cost of equity. Which of the following statements is correct? a) The project should definitely be rejected because its expected return (before risk adjustment) is less than its required return. b) 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 8 c) The accept/reject decision depends on the firm's risk-adjustment policy. If Coastal Energy's policy is to increase the required return on a riskier-than-average project to 3% overts, then it should reject the project. - 1 d) The project should definitely be accepted because its expected return (before any risk adjustments) is greater than its required return