Table 12.2
A firm is considering investment in a capital project which is described below. The firm's cost of capital is 18 percent and the risk-free rate is 6 percent. The project has a risk index of 1.5. The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital - Rf)
-It has been found that the value of the stock of corporations whose shares are traded publicly in an efficient marketplace is

Question

Table 12.2
A firm is considering investment in a capital project which is described below. The firm's cost of capital is 18 percent and the risk-free rate is 6 percent. The project has a risk index of 1.5. The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital - Rf) 
-It has been found that the value of the stock of corporations whose shares are traded publicly in an efficient marketplace is

Quizplus · Accepted Answer

Diversification generally does not affect the value of the stock of corporations whose shares are traded publicly in an efficient marketplace, unless greater returns are expected. This is because in an efficient market, diversification does not reduce risk as all the relevant risks are already reflected in the stock price. Therefore, diversification does not lead to a decrease in the required rate of return and does not affect the stock value.

Table 12.2 A Firm Is Considering Investment in a Capital Project Which