Under Normal Circumstances, the Weighted Average Cost of Capital Is

question 50

Multiple Choice

Under normal circumstances, the weighted average cost of capital is used as the firm's required rate of return because

• A)as long as the firm's investments earn returns greater than the cost of capital, the value of the firm will not decrease.
• B)returns below the cost of capital will cover all the fixed costs associated with capital and provide excess returns to the firm's stockholders.
• C)it is comparable to the average of all the interest rates on debt that currently prevail in the financial markets.
• D)it is an indication of the return the firm is earning from all of its assets in combination.

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Definitions:

Static Budgets

Fixed budgets that do not change in response to variations in business activity levels.

Manufacturing Overhead

Indirect costs related to the production process, such as utilities, maintenance, and salaried personnel, not directly attributable to specific units of output.

Variable

An element or factor that can change or vary, impacting the outcome of mathematical models, experiments, or financial forecasts.

Fixed Costs

These are expenses that do not change with the level of production or sales, such as rent, salaries, and insurance.