True – False Sequential investing is a way to measure risk not a way to manage r

Question

True – False Sequential investing is a way to measure risk not a way to manage risk.

True – False The weighted average cost of existing capital is the change in the total returns needed to satisfy investors in light of new investment, divided by the amount of capital needed for the investment.

True – False The rate paid on the funds raised by the corporation and then used for a new capital investment is the appropriate discount rate for you to use in capital budgeting regardless of the risk of the project.

True – False A new investment should not be justified by the benefits of moving to an optimal capital structure. The benefit of moving to an optimal capital structure can be had by raising more of one type of capital and using the proceeds to retire another, without making new investments.

Explanation / Answer

1) False: As sequential investing is not the way to measure risk but the way to manage risk. As sequential investing helps in investing in series based on risk and other factors.

2) False: The wighted average cost of existing capital is the amount of existing capital multiplied by cost of capital and then divided by the sum of capital or the amount of capital needed for investment.

3) False: The rate paid on the funds raised by the corporation and then used for a new capital investment is not the appropriate discount rate for you to use in capital budgeting regardless of the risk of the project.

4) True: A new investment should not be justified by the benefits of moving to an optimal capital structure. The benefit of moving to an optimal capital structure can be had by raising more of one type of capital and using the proceeds to retire another, without making new investments.

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