I need the sure answers for those two questions Please. 1)If a company uses the

Question

I need the sure answers for those two questions Please.

1)If a company uses the same discount rate to evaluate all projects,

A) it will become riskier over time, and its value will decline.

B) it will become riskier over time, and its value will rise.

C) it will become less risky over time, and its value will rise.

D) it will become less risky over time, and its value will decline.

E) there is no reason to expect its risk position or value to change.

2) Tropicali’s overall average cost of capital is 10%. Its frozen foods division is riskier than the firm as a whole, its fresh produce division has risk similar to the firm’s, and its institutional foods division has less risk. Tropicali adjusts for both divisional and project risk by adding/subtracting 2 percentage points to/from its corporate cost of capital. The hurdle rate for a low-risk project in the frozen foods division is:

a. 6%.

b. 8%.

c. 10%.

d. 12%.

e. 14%.

Explanation / Answer

1. Answer is a.

If a company uses the same discount rate to evaluate all projects, the firm will become riskier over time, and its value will decline.

2. Answer is d.

The overall average cost of capital is 10%. But, frozen food division is more riskier than the firm as a whole. The company adjusts the project risk by adding/subtracting 2 percentage points to/from its corporate cost of capital. Therefore, the cost of capital for frozen food division will be calculated as adding the adjustment factor of 2 to the overall average cost of capital considering the riskiness of the frozen food division.

Therefore, the hurdle rate for a low-risk project in the frozen foods division is 12%

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