1. The Burn Inc. is evaluating building a new widget factory and financing the p

Question

1. The Burn Inc. is evaluating building a new widget factory and financing the project entirely with retained earnings. The minimum rate of return the firm requires on this investment is called the project's:

Cost of equity.

2. All Hype Inc. uses its WACC as the discount rate when evaluating new projects. This means that the company will tend to do all of the following except:

Accept some negative net present value projects.

3. Bob's Burgers is considering renovating their restaurants and adding salad bars. The company believes that it will need to finance the project externally.  Incorporating flotation costs into the analysis of the project will:

1. The Burn Inc. is evaluating building a new widget factory and financing the project entirely with retained earnings. The minimum rate of return the firm requires on this investment is called the project's:

Explanation / Answer

1. Option a Required internal rate of return.
It is the minimum return required by a project such minimum NPV will be 0 and the projects becomes acceptable.

2. Option c Lower the risk of project over time.
WACC is calculated based on debt equity structure and as debt is taken the risk increases and not decreases.

3. Option b .Increase the project's rate of return because the Cost of equity or required rate of return = Dividend year1/ (Price*(1-flotation cost) . So higher flotation cost higher is the required rate of return.

Best of Luck. God Bless

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