3. Corporate borrowing power is (increased,decreased) _____ when an investment
is made in tangible assets which are highly related to the firm's fortunes.
The study guide says "decreased" while I think that the tangible asset is a
collateral which would support higher leveraging and thus increase corporate
borrowing power. Comments?
7. The MM formula for calculating the adjusted cost of capital applies to
projects which are equal in riskiness to the firm as well as to projects which
have their own unique risk characteristics, whereas the weighted-average cost of
capital (WACC) formula applies only to the (former,latter)_________.
The study guide says "latter" while page 518 of the text (1st paragraph, 3rd
sentence) says.. "Notice too that all the variables in the [WACC] formula refer
to the firm as a whole. As a result, the formula gives the right discount rate
only for projects that are just like the firm undertaking them." A strong
indication that "former" is the correct answer. Agreements/Disagreements?
Thank You.