The course: Corporate Finance

1. Because the WACC varies with the use of funds rather than the source of funds, some firms evaluate new projects by sorting projects into risk classes, and adding or subtracting adjustment factors from the WACC. This approach is called the

A. DuPont approach. B. pure play approach. C. divisional approach D. subjective approach.

FYI, the answer is not B.

2. When a firm has flotation costs equal to 6.8 percent of the funding need, project analysts should

A. increase the initial project cost by dividing that cost by (1-.068). B. increase the project's discount rate to offset these expenses by dividing the firm's WACC by (1-.068). C. add 6.8 percent to the firm's WACC to determine the discount rate for the project. D. increase the initial project cost by multiplying that cost by 1.068.