Explanation:
Shareholders’ wealth increases when ARAROC is greater than the risk-free rate. ARAROC can be computed using the following formula:
In order for shareholders to increase the value of their wealth, ARAROC should be greater than the risk-free rate. Clearly, this condition has been met and, therefore there is no need to increase it.
Q.3136 Sigma Inc. has an equity beta of 1.18. In addition, the risk-free rate is 2%, the expected market return is 7.932% and the RAROC on the proposed project is 10%. If the beta of the proposed project is the same as that of Sigma Inc, then, in order to increase the shareholders' wealth, ARAROC should increase by more than?
A
1.446%
B
1.592%
C
0.0000%
D
2.000%
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