If a Typical U

question 86

Multiple Choice

If a typical U.S.company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years,then the firm will most likely

• A) become riskier over time,but its intrinsic value will be maximized.
• B) become less risky over time,and this will maximize its intrinsic value.
• C) accept too many low-risk projects and too few high-risk projects.
• D) become more risky and also have an increasing WACC.Its intrinsic value will not be maximized.
• E) continue as before,because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.

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Definitions:

Wealth

The abundance of valuable resources or material possessions, or the control of such assets, which gives an individual or group economic power.

Income

The money received, usually on a regular basis, for work or through investments.

Caste System

An almost pure ascription-based stratification system in which occupation and marriage partners are assigned on the basis of caste membership.

Functional Theory

A theoretical perspective that analyzes society in terms of the functions performed by its different components or institutions.