Log in
Finance
1
answer
0
watching
265
views
2 Nov 2018

Suppose XYZ Industries 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 less risky over time, and this will maximize its intrinsic value.
b.

accept too many low-risk projects and too few high-risk projects.
c.

become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.
d.

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.
e.

become riskier over time, but its intrinsic value will be maximized.

Watch
1
answer
0
watching
265
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Beverley Smith
Beverley SmithLv2
4 Nov 2018

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

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 for the next 10 years. With this assumption, what are the consequences for the following three questions 1) will the entire firm become more risky or less risky 2) will it drive WACC higher or lower and 3) will such consequence maximize the company’s intrinsic value? Please provide detailed reasoning for your answers.

I need the sure answers for those two questions Please.

1)If a company uses the same discount rate to evaluate all projects,

A) it will become riskier over time, and its value will decline.

B) it will become riskier over time, and its value will rise.

C) it will become less risky over time, and its value will rise.

D) it will become less risky over time, and its value will decline.

E) there is no reason to expect its risk position or value to change.

2) Tropicali’s overall average cost of capital is 10%. Its frozen foods division is riskier than the firm as a whole, its fresh produce division has risk similar to the firm’s, and its institutional foods division has less risk. Tropicali adjusts for both divisional and project risk by adding/subtracting 2 percentage points to/from its corporate cost of capital. The hurdle rate for a low-risk project in the frozen foods division is:

a. 6%.

b. 8%.

c. 10%.

d. 12%.

e. 14%.

Please guys answer all the questions. I have to turn this in 6 hours. Thanks in Advance.

1)A firm should never undertake an investment if accepting it would increase the firm’s cost of capital.

A)True

B)False

2)If a investment under consideration has beta of zero, its purchase will not affect the firm’s market risk.

A)True

B)Fase

3) A particular project might have highly volatile forecasted cash flows, yet not have high market risk.

A)True

B)False

4)If a firm is considering purchasing an asset (with normal cash flows) whose beta is greater than the current beta of the firm, it should evaluate it using a discount rate greater than the firm’s current cost of capital.

A)True

B)False

5)If a company uses the same discount rate to evaluate all projects,

A)it will become riskier over time, and its value will decline.

B)it will become riskier over time, and its value will rise.

C)it will become less risky over time, and its value will rise.

D)it will become less risky over time, and its value will decline.

E)there is no reason to expect its risk position or value to change.

6)Tropicali’s overall average cost of capital is 10%. Its frozen foods division is riskier than the firm as a whole, its fresh produce division has risk similar to the firm’s, and its institutional foods division has less risk. Tropicali adjusts for both divisional and project risk by adding/subtracting 2 percentage points to/from its corporate cost of capital. The hurdle rate for a low-risk project in the frozen foods division is:

a. 6%.

b. 8%.

c. 10%.

d. 12%.

e. 14%.


Related Documents

FIN-3403 Lecture Notes - Lecture 14: Dividend Discount Model, Dividend Yield, Tax Rate
violethippopotamus705
FIN 401 Lecture Notes - Lecture 6: Capital Asset Pricing Model
tealmole524
FIN-3403 Lecture Notes - Lecture 14: Dividend Discount Model, Dividend Yield, United States Treasury Security
burgundybat929

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in