Which of the Following Statements Is FALSE

question 29

Multiple Choice

Which of the following statements is FALSE?

• A) A firm's weighted average cost of capital, denoted rwacc, is the cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt.
• B) Intuitively, the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model, a firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model.
• C) We interpret rwacc as the expected return a firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together.
• D) When using the discounted free cash flow model, we should use a firm's equity cost of capital.

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Definitions:

Diminishing Returns

A principle stating that after a certain point, additional investment or effort yields progressively smaller increases in output.

Marginal-cost Curve

The marginal-cost curve represents how the cost of producing one additional unit of a good changes as its production volume varies.

Marginal Product

The additional output that is generated by employing one more unit of a specific input, ceteris paribus.

Total Fixed Cost

The sum of all expenses that remain constant regardless of the level of production or output within a business.