If a Firm Uses Its Weighted Average Cost of Capital

question 49

Multiple Choice

If a firm uses its weighted average cost of capital (WACC) to evaluate all capital budgeting projects, which of the following could occur?

• A)Projects with little or no risk might be rejected when they actually should be accepted.
• B)Projects with significant risks might be accepted when the actually should be rejected.
• C)Projects with average risk will always be rejected when they actually should be rejected.
• D)All of the above could occur.
• E)None of the above could occur.

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Definitions:

Direct Method

The Direct Method in accounting refers to a way of reporting cash flows from operating activities by directly listing major classes of gross cash receipts and payments.

Operating Activities

The primary revenue-generating activities of a business which include production, sales, and delivery of the company’s main goods and services.

Accrual Basis

An accounting method where transactions are recorded when they are earned or incurred, regardless of when cash is exchanged, offering a more accurate financial picture.

Cash Basis

An accounting method where revenues and expenses are recorded when they are actually received or paid, not when they are incurred.