MacMillen Company Has Equal Amounts of Low-Risk, Average-Risk, and High-Risk

question 31

Multiple Choice

MacMillen Company has equal amounts of low-risk, average-risk, and high-risk projects.The firm's overall WACC is 12%.The CFO believes that this is the correct WACC for the company's average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects.The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources.If the CEO's position is accepted, what is likely to happen over time?

• A)The company will take on too many high-risk projects and reject too many low-risk projects.
• B)The company will take on too many low-risk projects and reject too many high-risk projects.
• C)Things will generally even out over time, and, therefore, the firm's risk should remain constant over time.
• D)The company's overall WACC should decrease over time because its stock price should be increasing.
• E)The CEO's recommendation would maximize the firm's intrinsic value.

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Definitions:

Concurrent Validity

The degree to which the results of a test correlate with the results of other established measures taken at the same time.

Test-retest Reliability

Test-retest reliability is a measure of the consistency of a psychological test or assessment's results over time when administered to the same individuals on separate occasions.

Content Validity

pertains to how well a test measures every aspect of the specified domain or topic it is intended to assess.

Concurrent Validity

The extent to which test scores correlate with scores from other assessments measuring the same construct at the same time.