1.

The most appropriate risk adjustment method for a firm that calculates an overall corporate WACC, yet has divisions with substantially different risk characteristics, is most likely a(n):

Select one:

a. Simulation approach.

b. Empirical approach.

c. Unbiased approach.

d. Objective approach.

e. Subjective approach.

2.

The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if:

Select one:

a. it calculates a negative NPV for the proposal.

b. the company expects to earn more than the risk-free rate.

c. the company has unique risk.

d. the proposal has a different degree of risk.

3.

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 _______________.

Select one:

a. capital adjustment approach

b. divisional cost of capital approach

c. pure play approach

d. subjective risk approach

e. security market line approach