A Firm Uses Its Weighted Average Cost of Capital to Evaluate

question 28

Multiple Choice

A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions.By doing so, the firm:

• A)automatically gives preferential treatment in the allocation of funds to its riskiest division.
• B)encourages the division managers to recommend only their most conservative projects.
• C)maintains the current risk level and capital structure of the firm.
• D)automatically maximizes the total value created for its shareholders.
• E)allocates capital funds evenly among its divisions.

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Definitions:

Unemployment

The situation in which individuals who are capable of working and are actively seeking employment are unable to find a job.

Inflation Rates

The frequency at which prices for goods and services overall increase, devaluing the purchasing capacity.

Natural Rate

often refers to the natural rate of unemployment, where the economy is at equilibrium, taking into account the frictional and structural factors.

Potential GDP

The maximum possible level of output an economy can achieve when it is most efficiently utilizing its resources.