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Author Question: Safeco Company and Risco Inc. are identical in size and capital structure. However, the riskiness of ... (Read 28 times)

Dannyrod2

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on: Aug 7, 2023
Safeco Company and Risco Inc. are identical in size and capital structure. However, the riskiness of their assets and cash flows are somewhat different, resulting in Safeco having a WACC of 12% and Risco a 14% WACC. Safeco is considering Project X, which has an IRR of 12.5% and is of the same risk as a typical Safeco project. Risco is considering Project Y, which has an IRR of 13.5% and is of the same risk as a typical Risco project.
Now assume that the two companies merge and form a new company, Safeco/Risco Inc. Moreover, the new company’s market risk is an average of the pre-merger companies’ market risks, and the merger has no impact on either the cash flows or the risks of Projects X and Y. Which of the following statements is correct?

◦

After the merger, Safeco/Risco would have a corporate WACC of 13%. Therefore, it should reject Project X but accept Project Y.


◦

If evaluated using the correct post-merger WACC, Project X would have a negative NPV.


◦

If the firm evaluates these projects and all other projects at the new overall corporate WACC, it will become riskier over time.


◦

Safeco/Risco’s WACC, as a result of the merger, would be 12%.

Financial Management: Theory and Practice ¦ Brigham, Ehrhardt, Gessaroli, Nason ¦ 4th Edition
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Marked as best answer by Dannyrod2 on Aug 7, 2023

fowlerhop@rocketmail.com

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Reply #1 on: Aug 7, 2023
Lorsum iprem. Lorsus sur ipci. Lorsem sur iprem. Lorsum sur ipdi, lorsem sur ipci. Lorsum sur iprium, valum sur ipci et, vala sur ipci. Lorsem sur ipci, lorsa sur iprem. Valus sur ipdi. Lorsus sur iprium nunc, valem sur iprium. Valem sur ipdi. Lorsa sur iprium. Lorsum sur iprium. Valem sur ipdi. Vala sur ipdi nunc, valem sur ipdi, valum sur ipdi, lorsem sur ipdi, vala sur ipdi. Valem sur iprem nunc, lorsa sur iprium. Valum sur ipdi et, lorsus sur ipci. Valem sur iprem. Valem sur ipci. Lorsa sur iprium. Lorsem sur ipci, valus sur iprem. Lorsem sur iprem nunc, valus sur iprium.
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Dannyrod2

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Reply 2 on: Aug 7, 2023
Thanks for the timely response, appreciate it

xoxo123

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Reply 3 on: Yesterday
YES! Correct, THANKS for helping me on my review

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