Suppose Acme Industries correctly estimates its WACC at a given point in time and then uses that same cost of capital to...
Suppose Acme Industries correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects of various risks for the next 10 years. ACME will most likely
a)become less risky over time, because it will tend to accept more low risk projects that high risk projects.
b)become more risky over time, because it will tend to accept more high risk projects that low risk projects.
c)continue at the same risk, because there is no reason to expect its risk position to change over time as a result of its use of a single cost of capital (WACC).
d) None of the above.
Homework Answers
The correct answer will be option B i.e. become more risky over time, because it will tend to accept more high risk projects that low risk projects.
Add Answer to:
Suppose Acme Industries correctly estimates its WACC at a given point in time and then uses that same cost of capital to...
Suppose a firms estimates its WACC to be 15%. Should the WACC be used to evaluate...
Suppose a firms estimates its WACC to be 15%. Should the WACC be used to evaluate all of its potential projects, even it they vary in risk? If not, what might be "reasonable" costs of capital for average-, high-, and low-risk projects? Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: risk-free rate = 3.20%; required return on the market = 15.75%; and beta=0.86. Based...
If a firm uses its WACC as the discount rate for all of the projects it...
If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects, II. accept some negative net present value projects. III. favor low risk projects over high risk projects. IV. become riskier over time. O A. I and III only B. III and IV only C I and II only I, II, and IV only I, II, III, and IV OD...
29. If a firm applies its overall cost of capital to all its proposed projects, then...
29. If a firm applies its overall cost of capital to all its proposed projects, then the divisions within the firm will tend to A) receive more B) avoid risky projects so that they will receive more funding. C) become less risky over time based on the projects that are accepted. D) have equal probabilities of receiving funding for their projects. . E) propose less risky projects than if separate discount rates were applied funding if they represent the riskiest...
1) if a company uses its WACC as the discount rate for all of the projects...
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...
If a company assigns the same cost of capital to all of its projects regardless of...
If a company assigns the same cost of capital to all of its projects regardless of each project's risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject. Why do you think this is a correct statement?
Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of...
Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of the following factors are outside a finn's control? Check all that apply. The firm's capital structure The general level of stock prices The effect of the tax rate on the cost of debt in the weighted average cost of capital equation Wellington Industries has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of...
Апаlysis OPTIMAL CAPITAL BUDGET Marble Construction estimates that its WACC is 10 % if equity comes...
Апаlysis OPTIMAL CAPITAL BUDGET Marble Construction estimates that its WACC is 10 % if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earmings. The company is considering the following seven investment projects: Project Size...
True or False question The after-tax cost of debt generally increases when a firm's bond rating...
True or False question The after-tax cost of debt generally increases when a firm's bond rating decreases. The weighted average cost of capital for a firm is the discount rate which the firm should apply to all of the projects it undertakes. Assigning discount rates to individual projects based on the risk level of each project may cause the firm's overall weighted average cost of capital to either increase or decrease over time. Other things being equal, the weighted average...
10-7: Composite, or Weighted Average, Cost of Capital, WACC WACC Midwest Electric Company (MEC) uses only...
10-7: Composite, or Weighted Average, Cost of Capital, WACC WACC Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd-11% as long as it financ at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (Do) was $2.20, its expected constant growth rate is 396, and its common stock sells for $21. MEC's tax rate is 40%. Two projects are available: Project...
1. The weighted average cost of capital (WACC) is calculated as the weighted average of cost of component capital, i...
1. The weighted average cost of capital (WACC) is calculated as the weighted average of cost of component capital, including debt, preferred stock and common equity. In general, debt is less expensive than equity because it is less risky to the investors. Some managers may intend to increase the usage of debt, therefore increase the weight on debt (Wd). Do you think by increasing the weight on debt (Wj) will reduce the WACC infinitely? What are the benefits and costs...
Suppose a firms estimates its WACC to be 15%. Should the WACC be used to evaluate all of its potential projects, even it they vary in risk? If not, what might be "reasonable" costs of capital for average-, high-, and low-risk projects? Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: risk-free rate = 3.20%; required return on the market = 15.75%; and beta=0.86. Based...
If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects, II. accept some negative net present value projects. III. favor low risk projects over high risk projects. IV. become riskier over time. O A. I and III only B. III and IV only C I and II only I, II, and IV only I, II, III, and IV OD...
29. If a firm applies its overall cost of capital to all its proposed projects, then the divisions within the firm will tend to A) receive more B) avoid risky projects so that they will receive more funding. C) become less risky over time based on the projects that are accepted. D) have equal probabilities of receiving funding for their projects. . E) propose less risky projects than if separate discount rates were applied funding if they represent the riskiest...
Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of the following factors are outside a finn's control? Check all that apply. The firm's capital structure The general level of stock prices The effect of the tax rate on the cost of debt in the weighted average cost of capital equation Wellington Industries has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of...
Апаlysis OPTIMAL CAPITAL BUDGET Marble Construction estimates that its WACC is 10 % if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earmings. The company is considering the following seven investment projects: Project Size...
10-7: Composite, or Weighted Average, Cost of Capital, WACC WACC Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd-11% as long as it financ at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (Do) was $2.20, its expected constant growth rate is 396, and its common stock sells for $21. MEC's tax rate is 40%. Two projects are available: Project...
1. The weighted average cost of capital (WACC) is calculated as the weighted average of cost of component capital, including debt, preferred stock and common equity. In general, debt is less expensive than equity because it is less risky to the investors. Some managers may intend to increase the usage of debt, therefore increase the weight on debt (Wd). Do you think by increasing the weight on debt (Wj) will reduce the WACC infinitely? What are the benefits and costs...
Most questions answered within 3 hours.
-
Each protein is composed of a maximum of ____________ different
amino acids in varying numbers and...
asked 3 minutes ago -
The mayor of a town has proposed a plan for the construction of
a new community....
asked 14 minutes ago -
2. KopyKat is a firm that specializes in printing business cards
using the latest laser technology....
asked 33 minutes ago -
What type of stock pays dividends in arrears?
A.
Nonminus−cumulative
preferred stock
B.
Cumulative preferred stock...
asked 31 minutes ago -
Discuss what issues you see as needing to be addressed in an
organization in order to...
asked 33 minutes ago -
Why does varying input frequency to a buck converter affect the
magnitude of the output voltage...
asked 36 minutes ago -
Given the following reduction half-reactions:
Fe3+(aq)+e−→Fe2+(aq)
E∘red=+0.77V
S2O2−6(aq)+4H+(aq)+2e−→2H2SO3(aq)
E∘red=+0.60V
N2O(g)+2H+(aq)+2e−→N2(g)+H2O(l)
E∘red=−1.77V
VO+2(aq)+2H+(aq)+e−→VO2+(aq)+H2O(l)
E∘red=+1.00V
Write balanced chemica
asked 37 minutes ago -
Consider a random variable X with PDF given by f(x)=1/10 for x =
0, 1, 2,...,9....
asked 35 minutes ago -
This is QA Tester's task
What was the most heinous bug that you let slip through?...
asked 49 minutes ago -
What is the chemical equation (with states) for this
reaction in balanced and unbalanced form?
In...
asked 52 minutes ago -
In engineering and product design, it is important to consider
the weights of people so that...
asked 57 minutes ago -
The first-order decomposition of N2O5 at 328 K has a rate
constant of 1.70 × 10-3...
asked 59 minutes ago