425.2
2.Circle any and/or all that are true:
The beta that a company uses for a capital
budgeting decision:
a. should reflect the total risk of the project.
b. should reflect the systematic risk of the project.
c. should reflect the company's cost of capital--that's what
investors used when they invested in the company.
d. should be a weighted average of the company's systematic risk
and the project's systematic risk.
Only b is true. Only the project's risk is relevant. The risk of the company tells us about the risk of projects already taken, not projects that the company is considering. If the company is going to spend shareholders' money on a new project, it must expect to make a return commensurate with the risk of the project.