Currently,Powell Products has a beta of 1.0,and its sales and profits are positively correlated with the overall economy.The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than one of the company's average projects.Also,the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong.On the basis of this information,which of the following statements is correct?
A)The proposed new project would have more stand-alone risk than the firm's typical project.
B)The proposed new project would increase the firm's corporate risk.
C)The proposed new project would not affect the firm's risk at all.
D)The proposed new project would have less stand-alone risk than the firm's typical project.

Question

Quizplus · Accepted Answer

The fact that the new project has a higher standard deviation and coefficient of variation than the typical project indicates that it has more stand-alone risk. Additionally, the countercyclical nature of the project's sales means that it would not be positively correlated with the overall economy like the firm's typical projects are. This also increases the stand-alone risk of the new project. Therefore, option A is correct. Option B is incorrect because the information given does not suggest that the new project would increase the firm's corporate risk. Option C is also incorrect because it is clear that the new project would have a different risk profile than the firm's typical projects. Option D is incorrect because the information given clearly states that the new project would have more stand-alone risk than the typical project.

Currently,Powell Products Has a Beta of 1