If a Typical U

question 86

Multiple Choice

If a typical U.S.company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years,then the firm will most likely

• A) become riskier over time,but its intrinsic value will be maximized.
• B) become less risky over time,and this will maximize its intrinsic value.
• C) accept too many low-risk projects and too few high-risk projects.
• D) become more risky and also have an increasing WACC.Its intrinsic value will not be maximized.
• E) continue as before,because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.

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Definitions:

NPV

Net Present Value; the difference between the present value of cash inflows and outflows over a period, used in capital budgeting to assess the profitability of an investment.

Project

A coordinated agenda of tasks linked together, intended to be carried out over an established duration and within specified cost and limitations.

Corporate Tax Rate

The percentage of a corporation's income that is taken as tax by the government.

Depreciation Tax Shield

A decrease in taxable income for businesses due to the allowance for depreciation, resulting in a lower tax liability.