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Question
Carolina Insurance Company, an all-equity life insurance firm, is considering the purchase of a fire insurance company. If the purchase is made, Carolina will be 50 percent larger than before. Currently, Carolina's stock has a beta of 1.2 and the return required is 15.2 percent. The fire insurance company is expected to generate a return of 20 percent with a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, should Carolina make the investment?
a. No; the expected return is less than the required return.
b. No; the IRR is less than the appropriate required rate of return.
c. Yes; the IRR is greater than the appropriate required rate of return.
d. Yes; the expected return is greater than the required return.
e. Yes; the project's risk/return combination lies above the SML.
Answer
This answer is hidden. It contains 142 characters.
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