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Louisiana Enterprises, an all-equity firm, is considering a new capital investment. Analysis has indicated that the proposed investment has a beta of 0.5 and will generate an expected return of 7 percent. The firm currently has a required return of 10.75 percent and a beta of 1.25. The investment, if undertaken, will double the firm's total assets. If kRF is 7 percent and the market return is 10 percent, should the firm undertake the investment? (Choose the best answer.)

a.Yes; the expected return of the asset (7%) exceeds the required return (6.5%).
b.Yes; the beta of the asset will reduce the risk of the firm.
c. No; the expected return of the asset (7%) is less than the required return (8.5%).
d.No; the risk of the asset (beta) will increase the firm's beta.
e.No; the expected return of the asset is less than the firm's required return, which is 10.75%.

Solution Preview

Answer: c. No; the expected return of the asset (7%) is less than the required return (8.5%).

We find the required return on ...

$2.19