Using the CAPM to Calculate the Cost of Capital for a Risky

question 2

Multiple Choice

Using the CAPM to calculate the cost of capital for a risky project assumes that:

• A)using the firm's beta is the same measure of risk as the project.
• B)the firm is all-equity financed.
• C)the financial risk is equal to business risk.
• D)Both A and B.
• E)Both A and C.

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Definitions:

Materiality Constraint

A principle that allows accountants to disregard minor errors or omissions in financial statements when such misstatements are not expected to influence the decision of a reasonable user.

Inappropriate Accounting Procedures

Accounting practices that do not comply with generally accepted accounting principles (GAAP) and may lead to misleading financial statements.

Qualitative Characteristics Exposure Draft

A preliminary document issued by accounting standards organizations proposing improvements or changes to the qualitative characteristics of financial information.

Logical Order

A method of arranging elements in a sequence based on their relationships or hierarchy, ensuring coherence and clear progression of ideas or steps.