Asked by Sandy Babbie on May 07, 2024
Verified
The pure play approach:
A) Cannot be used if the firm has preferred stock outstanding.
B) Is easier to implement than the subjective approach.
C) Is most useful when each division makes a multitude of different products.
D) Should be used only if a firm has more than three divisions.
E) Can be used to find the cost of capital for a division.
Pure Play Approach
An investment strategy focusing on companies that specialize in a specific industry sector or product, minimizing diversification to capitalize on sector strengths.
Cost Of Capital
The profit percentage a firm has to secure on its investments to uphold its market valuation and lure funding.
Preferred Stock
A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock.
- Gain insight into the techniques companies utilize to assess the weighted average cost of capital (WACC) for particular initiatives, focusing on the pure play strategy and subjective methods.
Verified Answer
ND
Nicole DowntoearthMay 09, 2024
Final Answer :
E
Explanation :
The pure play approach can be used to find the cost of capital for a division by identifying comparable companies (pure plays) in the same industry as the division and using their cost of capital as a proxy. This method is particularly useful for evaluating investment projects or divisions within a diversified company.
Learning Objectives
- Gain insight into the techniques companies utilize to assess the weighted average cost of capital (WACC) for particular initiatives, focusing on the pure play strategy and subjective methods.