The Use of WACC as the Discount Rate When Evaluating

question 9

Multiple Choice

The use of WACC as the discount rate when evaluating a project is acceptable when the:

• A)firm is well established and financially stable.
• B)WACC produces a positive NPV.
• C)risk of the project is equal to the risk of the firm.
• D)firm is well diversified and the unsystematic risk is negligible.
• E)project has only systematic risk.

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Definitions:

Covariances

A measure of how two variables move in relation to each other, indicating the degree to which they vary together.

Evolution of Beta

Refers to how the beta value of a security, indicating its volatility relative to the market, changes over time.

Forecast

A prediction or estimate of future events or trends, especially related to economic or weather conditions.

Last Year

A term that refers to the immediate past calendar year or the most recent complete fiscal year.