7- When calculating the Weighted Average Cost of Capital:

WACC = w_E R_E + w_D R_D(1-T_C) the term (1-T_C) reflects the fact that:

1. Debt is taxed more heavily that equity
2. Interest payments are tax deductible
3. Tax laws are written so as to discourage companies from taking on too much debt
4. Taxes make the cost of debt higher than what it otherwise would be
5. None of the above

8- Why it is necessary to make sure a project is in the same risk class as existing operations before using the WACC as the discount rate?

A) If a project has high risk, then it should be rejected.

B) If a project is in a different risk class then a different tax rate must be used.

C) Only projects with similar risk can result in positive NPVs.

D) A firm that uses its WACC to evaluate projects without regarding the risk class of the project will tend to become riskier over time.

E) The risk class of a proposed project is important only if it affects the firm's bond ratings.