A Firm Is Considering a Project That Is Virtually Risk-Free

question 265

Multiple Choice

A firm is considering a project that is virtually risk-free. The company has a beta of 1.3 and a debt-equity ratio of.4. The appropriate discount rate to use in analyzing this project is:

• A) The firm's latest WACC.
• B) An adjusted WACC based on a beta of 1.0.
• C) The cost of equity capital.
• D) The Treasury bill rate.
• E) Zero.

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Definitions:

Estimated Warranty Expense

Estimated Warranty Expense is an anticipated cost a company expects to incur related to its product warranties, predicting repairs or replacements it will provide for products sold within a given period.

Average Cost

A method of inventory valuation which calculates the cost of goods sold and ending inventory based on the average cost of all similar items.

Journal Entries

These are records of all the financial transactions of a business, recorded in the chronological order in which they occur.

Units Sold

The total quantity of products or goods a company has sold during a particular period.