Asked by Alexis Shyanne on May 07, 2024
Verified
Assigning separate discount rates to individual projects when determining which projects should be accepted by the firm:
A) May cause the firm's overall weighted average cost of capital to vary over time if the projects accepted change the overall risk level of the firm.
B) Will cause the firm's overall cost of capital to remain constant over time.
C) Will cause the firm's overall cost of capital to decrease over time.
D) Will change the debt-equity ratio of the firm over time.
E) Negates the principle goal of creating the most value for the shareholders.
Discount Rates
The rate of interest employed to discount future cash flows to their present value in discounted cash flow analysis.
Weighted Average
A mathematical calculation that takes into account the varying degrees of importance of the numbers it is applied to, often used in financial analysis and accounting.
Project Risk
The potential for losses or less than expected returns from a particular project due to factors such as cost overruns, delays, or changing conditions.
- Familiarize oneself with the notion of Weighted Average Cost of Capital (WACC) and its value in the field of financial management.
- Analyze the implications of financial decisions on a firm’s risk and return profile.
Verified Answer
AS
Amandeep SinghMay 13, 2024
Final Answer :
A
Explanation :
Assigning separate discount rates to individual projects can cause the firm's overall weighted average cost of capital to vary over time, especially if the projects accepted change the overall risk level of the firm. Different projects have different risk profiles, and using different discount rates reflects the firm's assessment of these risks. As the mix of projects changes, so too can the firm's overall risk profile, potentially affecting its cost of capital.
Learning Objectives
- Familiarize oneself with the notion of Weighted Average Cost of Capital (WACC) and its value in the field of financial management.
- Analyze the implications of financial decisions on a firm’s risk and return profile.