When fiRms Develop a WACC for Individual Projects Based on the Cost

question 157

Multiple Choice

When firms develop a WACC for individual projects based on the cost of capital for other firms in similar lines of business as the project, the firm is utilizing a ____________________.

• A) Subjective risk approach.
• B) Pure play approach.
• C) Divisional cost of capital approach.
• D) Capital adjustment approach.
• E) Security market line approach.

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Definitions:

Equipment Undervalued

Situations in which equipment's book value on financial statements is less than its current market value or replacement cost.

Partial Equity Method

An accounting approach where an investor recognizes a proportionate share of investee profits, but not as comprehensively as under the full equity method.

Noncontrolling Interest

A portion of equity in a subsidiary not attributed to the parent company, representing the minority shareholders' share of the assets and earnings.

Net Income

A company's total earnings or profit, calculated as revenues minus expenses, taxes, and the cost of goods sold.