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The Anderson Company has equal amounts of low - risk, average - risk, and high - risk projects. The firm's overall WACC is 1 2
The Anderson Company has equal amounts of lowrisk, averagerisk, and highrisk projects. The firm's overall WACC is The CFO believes that this is the correct WACC for the company's averagerisk projects, but that a lower rate should be used for lowerrisk projects and a higher rate for higherrisk projects. The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources. If the CEO's position is accepted, what is likely to happen over time? Question options: The company will take on too many lowrisk projects and reject too many highrisk projects. The company's overall WACC should decrease over time because its stock price should be increasing. The CEO's recommendation would maximize the firm's intrinsic value. The company will take on too many highrisk projects and reject too many lowrisk projects.
The Anderson Company has equal amounts of lowrisk, averagerisk, and highrisk projects. The firm's overall WACC is The CFO believes that this is the correct WACC for the company's averagerisk projects, but that a lower rate should be used for lowerrisk projects and a higher rate for higherrisk projects. The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources. If the CEO's position is accepted, what is likely to happen over time?
Question options:
The company will take on too many lowrisk projects and reject too many highrisk projects.
The company's overall WACC should decrease over time because its stock price should be increasing.
The CEO's recommendation would maximize the firm's intrinsic value.
The company will take on too many highrisk projects and reject too many lowrisk projects.
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