Business, 13.08.2020 17:01 hannahpelkey

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

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Answer from: daniellacalles

Available Options Are:

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.

Option D. Become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.

Explanation:

The reason is that different projects require different level of funding. If we are not increasing Debt and Equity at the same proportion for funding all the projects then we are actually increasing our WACC which means that the acceptability of the projects will not be appropriate here. The risk profile of all individual projects also matter because we use Ke cost of equity to calculate the WACC, which is calculated using the CAPM formula. And Beta Asset is the risk of the individual project industry which is used in the CAPM formula. All this increases the WACC which shows that the risk profile of the company has grown upwards.

Furthermore, if the WACC is higher then the intrinsic value of the projects can not be maximized and that's the reason why most firms try to have optimal level of capital structure (Percentage of equity and debt that gives lowest WACC).

Hence the option D is correct.

Answer from: Quest

hi,

henry is an economist and wants to understand the relationship between inflation and consumer spending habits. for his research, he needs the consumer price index for 2014 and the inflation rate. based on the prices of goods given, what will he find to be the cpi and inflation rate for 2014? assume that a consumer’s basket for three consecutive years consists of the following:

you dont privide answer choices.

answer - 15% of a inflatation rate is 15% less in cpi

Answer from: Quest

Whats the question? ?

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If a typical U. S. company correctly estimates its WACC at a given point in time and then uses that...

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