If a Typical Company Uses the Same Cost of Capital

question 42

Multiple Choice

If a typical company uses the same cost of capital to evaluate all projects, what will happen?

• A) The firm will likely become riskier over time, but its intrinsic value will be maximized.
• B) The firm will likely become riskier over time, and its intrinsic value will not be maximized.
• C) The firm will likely become less risky over time, and its intrinsic value will not be maximized.
• D) The firm will likely become less risky over time, and its intrinsic value will be maximized.

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Definitions:

Ex-dividend

The ex-dividend date is the date on which a stock begins trading without the entitlement to receive the most recently declared dividend, meaning buyers from that day onward will not receive the dividend.

Marginal Tax Rate

Amount of tax payable on the next dollar earned.

Cost of Equity

Cost of equity is the return that investors expect from an investment in a company, considering the risk of investing in its equity.

Stock Split

An action taken by a company to divide its existing shares into multiple shares to boost the liquidity of the shares, though the market value of the company does not change.