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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?
Question 22