If a Project Has a Higher Proportion of Fixed to Variable

question 13

Multiple Choice

If a project has a higher proportion of fixed to variable costs,holding the risk of its revenues constant:

• A)its beta will be lower,hence its cost of capital will be lower.
• B)its beta will be higher,hence its cost of capital will be higher.
• C)its beta will be unaffected,since beta does not measure the sensitivity of the project's cash flows to market risk.
• D)its financial leverage will be higher.

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Definitions:

Depreciation Expense

The portion of a fixed asset's cost allocated to expense across its useful life, reflecting the asset's consumption or decline in value.

Straight-Line

An approach where the expense of an asset is uniformly allocated across its lifespan to calculate depreciation.

Double-Declining-Balance

A depreciation technique that increases the standard rate of depreciation twofold, thus diminishing an asset's value at a faster pace.

Units-of-Activity

A depreciation method that allocates the cost of an asset over its useful life based on the number of units it produces or hours it operates.