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

question 15

Multiple Choice

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

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Definitions:

Self-Efficacy

An individual's belief in their own ability to complete tasks and achieve goals.

Environmental Influences

External factors that impact an individual’s behavior, development, and life outcomes, including social, physical, and cultural environments.

Psychoanalytic Perspective

The psychoanalytic perspective is a theory of psychology proposed by Freud that emphasizes unconscious processes, childhood experiences, and defense mechanisms in shaping behavior and personality.

Psychological Product

An outcome or result of a psychological process, theory, or intervention.