The MacMillen Company Has Equal Amounts of Low-Risk,average-Risk,and High-Risk Projects

question 37

Multiple Choice

The 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.

---

Definitions:

Constant

A situation or value that does not change or vary, often used in the context of scientific experiments or mathematical equations.

REM Sleep

REM sleep, or Rapid Eye Movement sleep, is a phase of sleep characterized by fast eye movements, vivid dreams, and increased brain activity.

N1 Sleep

The initial stage of non-REM sleep characterized by light sleep, from which a person can be easily awakened.

N2 Sleep

A stage of sleep within the non-REM cycle characterized by sleep spindles and K-complexes, marking a deeper sleep than N1 and preceding the deepest, N3 stage.