A Proposed Project Has a Positive NPV When Evaluated at the Company

question 7

Multiple Choice

A proposed project has a positive NPV when evaluated at the company cost of capital. If the firm employs debt in its capital structure, will the project remain acceptable after evaluation with the WACC?

• A) Yes, using the WACC will increase the NPV.
• B) No, using the WACC will decrease the NPV.
• C) The project may now become unacceptable.
• D)There will be no change in the project's NPV.

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Definitions:

Strike Price

The strike price, in options trading, is the price at which the holder of an option contract can buy (call option) or sell (put option) the underlying security or commodity.

Call Option

A financial contract giving the buyer the right, but not the obligation, to purchase an asset at a specified price within a particular time frame.

Option Contract

A financial contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a specified price on or before a specific date.

Exercise Price

The set price at which an option's owner has the right to purchase (for a call option) or sell (for a put option) the underlying asset or commodity.