When Computing the Cost of Capital

question 95

Multiple Choice

When computing the cost of capital:

• A)Firms with business units having different levels of risk should calculate the cost of capital for each unit separately.
• B)It is not necessary to compute the cost of capital separately as the market risk across all units will average out.
• C)Using a single cost of capital for a firm with units with different market risks is advisable as it provides investors with a focused metric for assessing the returns they can expect.
• D)Determining the cost of capital is of secondary importance to the firm's forecast of sales growth,so a single cost of capital calculation for all business units is acceptable.
• E)Since assessing a firm's cost of capital cannot be done with a reasonable level of accuracy,calculating a separate cost for each business unit is not necessary.

---

Definitions:

Nauseous Reaction

A nauseous reaction is a physiological response to various stimuli, resulting in the urge to vomit.

Unconditioned Response

An automatic, natural reaction to a stimulus that occurs without prior learning or conditioning.

Conditioned Stimulus

A previously neutral stimulus that, after becoming associated with the unconditioned stimulus, evokes a conditioned response.

Classical Conditioning

An educational method where two stimuli are consistently associated together, leading to a reaction initially triggered by the second stimulus being provoked solely by the first stimulus over time.