A firm that is considering purchasing a capital budgeting project with a beta coefficient greater than the firm's current beta coefficient should evaluate the project using a risk-adjusted required rate of return that is greater than the firm's existing (average) required rate of return.

Question

Quizplus · Accepted Answer

This is because the capital budgeting project with a higher beta coefficient is considered to be riskier than the firm's existing portfolio of assets. Therefore, the firm should account for this additional risk by using a higher risk-adjusted required rate of return when evaluating the project.

A Firm That Is Considering Purchasing a Capital Budgeting Project