If a Firm Uses a Project-Specific Cost of Capital for Evaluating

question 2

Multiple Choice

If a firm uses a project-specific cost of capital for evaluating all projects, which situation(s) will likely occur?

• A)The firm will accept poor low-risk projects only.
• B)The firm will reject good high-risk projects only.
• C)The firm will correctly accept projects with average risk only.
• D)The firm will accept poor low-risk projects, reject good high-risk projects, and correctly accept projects with average risk.

---

Definitions:

Recourse

In secured lending, if the asset collateralizing a loan proves not to have the value anticipated, recourse implies the borrower is still responsible for the debt. The lender is said to have recourse to the borrower.

Seasonal Working Capital

Additional working capital needed to support fluctuations in business activity due to seasonal changes in demand.

Short-Term Loans

Loans that are scheduled to be repaid in less than a year, often used for working capital or emergency financing needs.

Dividend Payments

Distributions of a portion of a company's earnings, decided by the board, to a class of its shareholders.