If a Firm Uses Its Weighted Average Cost of Capital

question 49

Multiple Choice

If a firm uses its weighted average cost of capital (WACC) to evaluate all capital budgeting projects, which of the following could occur?

• A)Projects with little or no risk might be rejected when they actually should be accepted.
• B)Projects with significant risks might be accepted when the actually should be rejected.
• C)Projects with average risk will always be rejected when they actually should be rejected.
• D)All of the above could occur.
• E)None of the above could occur.

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Definitions:

Investment Income

Income generated from the allocation of funds into interest-bearing or dividend-yielding assets.

Unallocated Positive

A term that is not widely recognized as standard in accounting or finance; it may refer to surplus income or assets not yet designated for a specific purpose but NO.

Goodwill

An intangible asset that arises when a buyer acquires an existing business, representing the value of the business's reputation, brand, and other unidentifiable assets.

Significant Influence

The power to participate in the financial and operating policy decisions of an investee, but not control them, typically associated with ownership of 20%-50% of voting stock.