Question

Oneta Chemical Company evaluated a project that is riskier than the firm's average risk. It generally expects a return of 12% from an average-risk project and adjusts the discount rate by 3% depending on the risk of a project. Oneta should expect a return of _____ from this project.

Answer 1

Answer:

The question is missing options below:

a. 12%

b. 15%

c. 3%

d. 9%

Your best bet is option B,15%

Explanation:

There is a perfect positive  correlation  between risk and return when making investment decisions,in that a higher risk investment is compensated with higher return and vice versa.

The company earns  a return of 12% averagely,but the current project is more riskier, in other words,there has to be an incentive over and above the current return for this project to be acceptable.

In other words, the 3% extra is added to the average return of 12% ,giving an expected return of 15%(12%+3%)

Option A would have been correct if the new project has the same level of risk as existing ones.

Option D would been chosen if the new project is less riskier(12%-3%)