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:

Short-term Loss

A loss realized on the sale or exchange of an asset held for one year or less.

Long-term Loss

The loss realized from the sale of an asset held for more than one year, which can offset long-term gains for tax purposes.

Capital Gain

The profit made from the sale of a capital asset, like real estate or stocks, that exceeds the purchase price.

Worthless

Pertaining to an asset that has lost all monetary value.