If a Firm Uses the Same Company Cost of Capital

question 15

Multiple Choice

If a firm uses the same company cost of capital for evaluating all projects, which situation(s) will likely occur?
I.The firm will reject good low-risk projects;
II.The firm will accept poor high-risk projects;
III.The firm will correctly accept projects with average risk

• A)I only
• B)I and II only
• C)I,II, and III
• D)II only

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Definitions:

FVE Method

An accounting technique where assets and liabilities are valued and reported at their fair value for financial reporting purposes.

Cost Method

An accounting method for investment, where the investment is recorded at cost and is adjusted for dividends received, rather than market value fluctuations.

Investment Account

An account held at a financial institution that contains securities, cash, and other investments owned by the account holder.

Net Income

The profit of a company after all expenses, taxes, and costs have been subtracted from total revenue.