Question

Choose the best answer:

O Investment decisions should be based upon the criterion that a project's expected return must be less than the weighted marginal cost of capital (WMCC) for the firm.
O The weighted average cost of capital will rise whenever there is a rise in the cost of any one of the capital sources.
O The level of total financing at which the cost of one of the capital sources rises is called a breaking point.
O All statements are correct.
O All statements are incorrect.

Answer 1

Option B is correct.

Step-by-step explanation:

Option A is incorrect because the expected return must be greater than the marginal cost of the capital which means that the Net Present Value must be positive.

Option B is correct because the increase in cost of debt or capital would increase the weighted average cost of capital. This is because weighted average cost of capital is directly proportional to cost of capital sources.

Option C is incorrect because its not the cost of one of the capital sources, actually it is the weighted average cost of capital which when starts increasing at a point due to increase in the level of financing is known as breaking point.

So the only statement that is correct is option B.

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