Suppose a fiRm Uses a Constant WACC in Determining the Value

question 91

Multiple Choice

Suppose a firm uses a constant WACC in determining the value of capital budgeting projects rather than using the security market line. The firm will tend to _____________________.

• A) Accept profitable, low risk projects and reject unprofitable, high risk projects.
• B) Accept profitable, low risk projects and accept unprofitable, high risk projects.
• C) Reject unprofitable, high risk projects.
• D) Become more risky over time.
• E) Accept profitable, low risk projects.

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Definitions:

Ratifying

The formal approval or confirmation of an agreement or treaty, often requiring the final consent of the involved parties or governing bodies.

Personal Liability

involves the responsibility of an individual to personally satisfy debt or liability, potentially involving personal assets.

Fiduciary Relationship

A legal relationship wherein one party has the duty to act in another's best interests in matters over which they hold a trust or confidence.

Director

A member of the board of directors of a company who is responsible for participating in the decision-making processes regarding the company's management.