If a Firm Earns the WACC as an Average Return

question 54

Multiple Choice

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

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

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Definitions:

Competitive Price-Taker

A market participant who accepts the prevailing market prices as given because they have no power to influence those prices due to intense competition.

Marginal Cost

The increase in total cost that arises from producing one additional unit of a product or service.

Profit Maximized

The point at which a firm achieves the highest profit possible, considering the level of output and cost of production.

Competitive Price-Taker

An entity in a market that has no control over the prices at which its products are sold, typically due to intense competition and product uniformity.