Problems with Using the Same Company-Wide Cost of Capital for All

question 78

Multiple Choice

Problems with using the same company-wide cost of capital for all projects potentially include

• A)biasing project selection towards high risk, high return projects.
• B)rejection of worthwhile low risk projects.
• C)spending an unjustified amount of managerial time and effort justifying a lower cost of capital so that pet projects will be accepted.
• D)All of the above.

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Definitions:

Collateral

Assets pledged by a borrower to secure a loan or credit, which can be seized by the lender if the borrower fails to repay.

Perfected Interest

A legal claim or lien that has been formally established to secure priority over other claims concerning the same asset or property.

Repossession

The process by which a creditor takes back property from the borrower, due to failure to make required payments.

Security Interest

A legal claim or right granted in an asset as collateral to ensure the fulfilment of an obligation, typically repayment of a loan.