A single, overall cost of capital is often used to evaluate projects because:
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A. B. C. D.A
The concept of cost of capital is essential in determining the required rate of return for investment projects. The cost of capital refers to the minimum rate of return that a company must earn to satisfy its investors or shareholders' required rate of return. The cost of capital is calculated by taking into account the various sources of financing that a company uses, such as equity, debt, and preferred stock. The weight of each financing source is then multiplied by its respective cost to determine the company's overall cost of capital.
A single, overall cost of capital is often used to evaluate investment proposals because it simplifies the evaluation process. In particular, option A, "It avoids the problem of computing the required rate of return for each investment proposal," is correct because calculating the required rate of return for each investment proposal can be time-consuming and complicated. By using a single, overall cost of capital, the company can streamline its investment decision-making process and focus on identifying the most promising investment opportunities.
However, the other options are incorrect. Option B, "It is the only way to measure a firm's required return," is incorrect because a firm's required return can be measured in other ways, such as by evaluating the risk and return characteristics of different investment projects.
Option C, "It acknowledges that most new investment projects have about the same degree of risk," is incorrect because not all investment projects have the same degree of risk. The degree of risk varies depending on the project's nature, market conditions, and other factors.
Option D, "It acknowledges that most new investment projects offer about the same expected return," is also incorrect because investment projects can have different expected returns based on their risk and return characteristics.
In summary, using a single, overall cost of capital to evaluate investment proposals simplifies the decision-making process by avoiding the need to calculate the required rate of return for each investment proposal. However, it does not mean that all investment projects have the same degree of risk or expected return.