7. Cloudesdale Corporation is considering a project that has an estimated risk-adjusted return on capital (RAROC) of 13%. Suppose that the risk-free rate is 3% per year, the expected market rate of return is 11% per year, and the firm's equity beta is 1.3. Using the criterion of adjusted risk-adjusted return on capital (ARAROC), Cloudesdale should:a. Reject the project because the ARAROC is higher than the market expected excess return.b. Accept the project because the ARAROC is higher than the market expected excess return.c. Reject the project because the ARAROC is lower than the market expected excess return.d. Accept the project because the ARAROC is lower than the market expected excess return.

CLOUDESDALE CORPORATION IS CONSIDERING A PROJECT THAT HAS AN ESTIMA...

2015 FRM PRACTICE EXAM

Cloudesdale Corporation is considering a project that has an estimated risk-adjusted return on capital

(RAROC) of 13%. Suppose that the risk-free rate is 3% per year, the expected market rate of return is 11% per

year, and the firm's equity beta is 1.3. Using the criterion of adjusted risk-adjusted return on capital

(ARAROC), Cloudesdale should:

Reject the project because the ARAROC is higher than the market expected excess return.

Accept the project because the ARAROC is higher than the market expected excess return.

Reject the project because the ARAROC is lower than the market expected excess return.

Accept the project because the ARAROC is lower than the market expected excess return.