Suppose Acme Industries Correctly Estimates Its WACC at a Given

question 47

Multiple Choice

Suppose Acme Industries 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 less risky over time, and this will maximize its intrinsic value.
• B) accept too many low-risk projects and too few high-risk projects.
• C) become more risky and also have an increasing wacc. its intrinsic value will not be maximized.
• D) 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.
• E) become riskier over time, but its intrinsic value will be maximized.

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Definitions:

Inventory Turnover

A measure of how many times a company's inventory is sold and replaced over a period, indicating the efficiency of the company in managing and selling its stock.

Quick Ratio

A liquidity ratio that measures a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory.

Acid-Test Ratio

A financial metric used to evaluate a company's short-term liquidity position by dividing its most liquid assets by its current liabilities.

Current Ratio

A financial metric indicating a firm's capacity to fulfill its short-term debts, which are obligations due within the next year, by dividing its current assets by its current liabilities.