Question

1) if a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to:
A) reject all high-risk projects
B) accept all positive net present value projects
C) increase the average risk level of the company over time
D) favor low-risk projects over high-risk projects
F) reject all negative net present value projects

2)Which one of the following is an example of unsystematic risk?
A) Decrease in the national level of inflation
B) an across the board increase in income taxes
C) national decrease in consumer spending on entertainment
D) an increased feeling of global prosperity

Please explain why, not just answers. Thank you!
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Answer 1

Answer 1: Option C is correct
Explanation:
If a company uses its WACC as the discount rate for all the projects it undertakes, then it would favor high risk projects (with higher returns) over low risk project.
For example, the net present value of a high risk project will appear high if lower discount rate like the WACC of a company is used instead of the higher cost of capital of the project.
Net present value=-Initial cash out flow + Present value of future cash flows
Accepting (or favoring) high risk projects increases the average risk level of a company over time.

Answer 2: Option C is correct
Explanation:
Unsystematic risk refers to the risk related to specific company or industry. National decrease in consumer spending on entertainment is a risk related to entertainment industry.