1) In general, firms should use their weighted average cost of capital (WACC) to
ID: 2668191 • Letter: 1
Question
1) In general, firms should use their weighted average cost of capital (WACC) to evaluate capital budgeting projects because most projects are funded with general corporate funds, which come from a variety of sources. However, if the firm plans to use only debt or only equity to fund a particular project, it should use the after-tax cost of that specific type of capital to evaluate that project. T/F?2) In cash flow estimation, the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows . T/F?
3) If a firm's projects differ in risk, then one way of handling th is problem is to evaluate each project with the appropriate risk-adjusted discount rate. T/F?
4) The cost of equity raised by retaining earnings can be less than , equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates , flotation costs, the attitude of investors, and other factors. T/F?
5) Any cash flows that can be classified as incremental to a particular project, such as results directly from the decision to undertake the project-should be reflected in the capital budgeting analysis. T/F?
Explanation / Answer
1.) T (WACC can still be used, it's just unnecessary extra calculations.) 2.) T (Synergy or cannibalization of other assets) 3.) T 4.) F 5.) T
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