If a Firm Earns the WACC as an Average Return

question 2

Multiple Choice

If a firm earns the WACC as an average return on its average-risk assets, then:

• A)equity holders will be satisfied, but bondholders will not.
• B)bondholders will be satisfied, but equity holders will not.
• C)all investors will earn their minimum required rate of return.
• D)the firm is investing only in positive NPV projects.

---

Definitions:

Perpetual Fund

A type of investment fund that has no fixed maturity date, often aiming to provide investors with a steady income indefinitely.

Indexed Annuity

An annuity that earns interest or provides benefits that are linked to the performance of a specified index of the stock market.

Compounded Quarterly

A method where interest is added to the principal amount of an investment or loan at the end of every three months, leading to interest earning interest.

Deferred Annuity

A financial product that delays payments of income, installments, or a series of payments until a specified future date.