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:

Tax Incidence

The analysis of the effect of a particular tax on the distribution of economic welfare, focusing on who ultimately bears the burden of the tax.

Externality Analysis

The study of costs or benefits that affect parties who did not choose to incur that cost or benefit, typically used in the context of environmental and public policy.

Public Interest Theory

A theory suggesting that regulation is supplied in response to the demand of the public for the correction of inefficient or inequitable market practices.

Excise Tax

A tax on the sale or consumption of specific goods or services, such as tobacco, alcohol, and fuel.