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Understanding risks that affect projects and the impact of risk consideration Yatta Net International has manufacturing, distribution, retail, and consulting divisions. Projects undertaken by the
Understanding risks that affect projects and the impact of risk consideration
Yatta Net International has manufacturing, distribution, retail, and consulting divisions. Projects undertaken by the manufacturing and distribution divisions tend to be lowrisk projects, because these divisions are well established and have predictable demand. The company started its retail and consulting divisions within the last year, and it is unknown if these divisions will be profitable. The company knew that opening these new divisions would be risky, but its management believes the divisions have the potential to be extremely profitable under favorable market conditions. The company is currently using its WACC to evaluate new projects for all divisions.
If Yatta Net International does not riskadjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply.
The firm could potentially reject projects that provide a higher rate of return than the company should require.
The firm will increase in value.
The firms overall risk level will increase.
Generally, a positive correlation exists between a projects returns and the returns on the firms other assets. If this correlation is standalone risk will be a good proxy for withinfirm risk.
Consider the case of another company. Chrome Printing is evaluating two mutually exclusive projects. They both require a $ million investment today and have expected NPVs of $ Management conducted a full risk analysis of these two projects, and the results are shown below.
Risk Measure Project A Project B
Standard deviation of projects expected NPVs $ $
Project beta
Correlation coefficient of project cash flows relative to the firms existing projects
Which of the following statements about these projects risk is correct? Check all that apply.
Project B has more corporate risk than Project A
Project B has more standalone risk than Project A
Project A has more corporate risk than Project B
Project A has more standalone risk than Project B
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