The Use of WACC to Select Investments Is Acceptable When

question 9

Multiple Choice

The use of WACC to select investments is acceptable when the:

• A) correlations of all new projects are equal.
• B) NPV is positive when discounted by the WACC.
• C) risks of the projects are equal to the risk of the firm.
• D) firm is well diversified and the unsystematic risk is negligible.
• E) None of these.

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Definitions:

Cash Flow

The aggregate measure of capital movement into and from a business, significantly affecting its solvency.

Capital Budgeting

The process of evaluating and selecting long-term investments that are in line with the goal of maximization of shareholder wealth.

Income Tax Expense

The cost incurred by businesses and individuals due to earnings, computed based on tax rates and laws.

Capital Budgeting

The process of evaluating and selecting long-term investments that are in line with the goal of wealth maximization.