Why Should Firms That Own and Operate Multiple Businesses That

question 91

Multiple Choice

Why should firms that own and operate multiple businesses that have different risk characteristics use business-specific,or divisional costs of capital?

• A) Not all divisions have equal risk and the firm might accept projects whose returns are higher than are deemed appropriate.
• B) Not all business divisions have equal risk and the firm will likely become less risky in the future.
• C) Not all lines of business have equal risk and it is likely that the firm will accept projects whose returns are unacceptably low in relation to the risk involved.
• D) Use of the same weighted average cost of capital for all divisions may result in too much money being allocated to the least risky division.

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Definitions:

Perpetual Inventory System

An accounting method that records inventory purchases or sales in real-time through the use of computerized systems.

Invoice Payment

Invoice Payment refers to the process of paying off the amount owed for goods or services received, as documented by an invoice issued by the supplier or service provider.

Discount Period

The time period during which a payment can be made at a discounted rate before the full amount becomes due.

Credit for Returns

Refunds issued to customers or credits applied against customer accounts for returned goods or services.