Which of the Following Statements Is False

question 81

Multiple Choice

Which of the following statements is false?

• A) If we can identify a comparison firm whose assets have the same risk as the project being evaluated, and if the comparison firm is levered, then we can use its equity cost of capital as the cost of capital for the project.
• B) We can calculate the cost of capital of the firm's assets by computing the weighted average of the firm's equity and debt cost of capital, which we refer to as the firm's weighted average cost of capital (WACC).
• C) The portfolio of a firm's equity and debt replicates the returns we would earn if the firm were unlevered.
• D) When evaluating any potential investment project, we must use a discount rate that is appropriate given the risk of the project's free cash flow.

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Definitions:

Efficient Frontier

A graphical representation in modern portfolio theory showing the set of optimal portfolios that offer the highest expected return for a defined level of risk or vice versa.

Firm-specific Risk

The risk associated with an individual company, distinct from market risk, that can affect the company's stock price.

Diversifiable Risk

The portion of investment risk that can be reduced or eliminated through diversification in an investment portfolio.

Unique Risk

Another term for diversifiable risk, emphasizing the idea that this risk is specific to an individual investment and not the market as a whole.