If a Typical U

question 86

Multiple Choice

If a typical U.S.company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years,then the firm will most likely

• A) become riskier over time,but its intrinsic value will be maximized.
• B) become less risky over time,and this will maximize its intrinsic value.
• C) accept too many low-risk projects and too few high-risk projects.
• D) become more risky and also have an increasing WACC.Its intrinsic value will not be maximized.
• E) continue as before,because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.

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Definitions:

One-tailed Test

A statistical test in which the region of rejection is on only one side of the sampling distribution.

Level of Significance

A predetermined threshold in hypothesis testing, below which the null hypothesis is rejected, indicating statistical significance.

Null Hypothesis

A hypothesis that assumes no significant difference or relationship exists in the general population from which a sample is drawn.

Variance

A measure of the dispersion of a set of data points around their mean; the square of the standard deviation.