Question

Which of the following statements is true about the use of a single, firm-wide cost of capital for evaluating all of a firm's investment projects?

Question 6 options:

	A) Firms do not ever do that, nor should they.
	B) Firms that operate in multiple divisions, spanning the globe, can view their cost-of-capital calculation as diversifiable and thus use a single cost-of-capital.
	C) Firms operating in a single, narrow line of business are most likely to appropriately use one cost of capital for all projects.
	D) This is a trick question - cost of capital only applies to firms, not to projects.
	E) Firms do that often, but only out of ignorance, and it is always incorrect.

Answer 1

Answer is:
C) Firms operating in a single, narrow line of business are most likely to appropriately use one cost of capital for all projects.

Explanation:

Firms operating in single or narrow business can apply the overall cost of capital for evaluating its various projects because of the uniformity/homogeneous nature of the business.

If a firm has various business then the cost of capital of one cannot be used to another because of the different degrees of risk involved in different businesses.

Example: Automobile business (TATA MOTORS) is more risker than FMCG business (TATA GLOBAL BEVERAGE). Even though both these companies comes under the same parent company TATA SONS.

Incorrect explanation.

A.- they can do it depending upon the circumstances.
B. If a firm has various business then the cost of capital of one cannot be used to another because of the different degrees of risk involved in different businesses.

Example: Automobile business (TATA MOTORS) is more risker than FMCG business (TATA GLOBAL BEVERAGE). Even though both these companies comes under the same parent company TATA SONS.
D. Not tricky. It's conceptual.
E. They don't do it often.