Asked by Johnny Reyes on Jun 26, 2024
Verified
When firms develop a WACC for individual projects based on the cost of capital for other firms in similar lines of business as the project, the firm is utilizing a ____________________.
A) Subjective risk approach.
B) Pure play approach.
C) Divisional cost of capital approach.
D) Capital adjustment approach.
E) Security market line approach.
Pure Play Approach
Use of a WACC that is unique to a particular project.
WACC
Weighted Average Cost of Capital; a measure of a firm's cost of capital where each category of capital is proportionately weighted.
Capital
Refers to financial assets or their financial value, as well as the tangible factors of production that are used to create other goods and services.
- Understand how firms estimate the weighted average cost of capital (WACC) for individual projects, including the pure play approach and subjective approaches.
Verified Answer
ZK
Zybrea KnightJul 01, 2024
Final Answer :
B
Explanation :
The correct answer is the Pure play approach. This method involves using the cost of capital from other firms that specialize in the project's area, providing a more accurate reflection of the project's risk and potential return.
Learning Objectives
- Understand how firms estimate the weighted average cost of capital (WACC) for individual projects, including the pure play approach and subjective approaches.