Activa Sports Gyms Is Considering a Project That Is Virtually

question 9

Multiple Choice

Activa Sports Gyms is considering a project that is virtually risk-free.It has a beta of 1.5 and a D/E ratio of 0.6.The appropriate discount rate to use in analyzing this project is:

• A)The cost of equity computed from its beta.
• B)The adjusted WACC based on a beta of 1.0.
• C)The WACC based on market values.
• D)The Treasury-bill rate.

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Definitions:

Allocation Base

A measure or statistic used to allocate costs among different departments, products, or activities within an organization.

Overhead Costs

Expenses not directly tied to production, including rent, utilities, and administrative costs.

Plantwide Overhead Rate

A single overhead absorption rate used throughout an entire plant or facility, applied uniformly to all cost objects irrespective of the department in which they were created.

Machine Hours

A measure of the amount of time a machine is used in the production process, often used to allocate manufacturing overhead costs.