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Question 20
2 out of 2 points
Which of the following statements is CORRECT?
Question 21
Safeco Company and RiscoInc 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 10% and
Risco a WACC of 12%. Safeco is considering Project X, which has an
IRR of 10.5% and is of the same risk as a typical Safeco project. Risco
is considering Project Y, which has an IRR of 11.5% 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?