If a Project Comes with Its Own Funding Offered at a Rate

question 9

Multiple Choice

If a project comes with its own funding offered at a rate lower than the cost of capital, the capital budgeting analysis should be conducted using:

• A)the offered rate because it is appropriate to match sources and uses of funding whenever possible.
• B)the cost of capital because to do otherwise would be unfair to departments whose projects don't happen to have separate funding.
• C)the cost of capital because doing otherwise leads to irrational capital budgeting decisions.
• D)an average of the offered rate and the cost of capital because that gives the best measure of the effect of the offer on the firm.

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Definitions:

Annual Reports

Comprehensive reports on a company's activities throughout the preceding year, intended to give shareholders and other interested parties information about the company's financial performance.

Footnotes

Additional information provided in financial statements to clarify figures or add context for readers.

Cost Method

A valuation approach in accounting that assigns the initial purchase price to inventories or investments.

Treasury Stock

Shares of a company's own stock that it has reacquired from shareholders, but not retired, and are available for reissuance or other corporate uses.