The Pure Play Approach

question 302

Multiple Choice

The pure play approach:

• A) Cannot be used if the firm has preferred stock outstanding.
• B) Is easier to implement than the subjective approach.
• C) Is most useful when each division makes a multitude of different products.
• D) Should be used only if a firm has more than three divisions.
• E) Can be used to find the cost of capital for a division.

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Definitions:

Producer Surplus

The difference between the amount producers are willing to accept for a good or service and the actual amount they receive, due to market price.

Firm's Willingness

A company's propensity to engage in certain actions based on its economic interests and goals.

Consumer Surplus

The discrepancy between what consumers are prepared and capable of paying for a product or service and the actual amount they end up spending.

Willingness to Pay

The maximum amount an individual is prepared to spend on a good or service, reflecting the value they place on it.