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    Financial & Economic Guidance

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    I've got the following questions that I would like your opinion/guidance on. Any guidance is appreciated.

    1.) Many firms use the weighted average cost of capital for the firm as the hurdle rate when comparing to IRR or as the discount rate in an NPV calculation. However, there is an implicit assumption being made when one does that. What problems can one encounter or what errors may occur if one uses the WACC for evaluating all projects where the projects have significantly different risk exposures? Why?

    2.) Why would a firm choose to repurchase its stock? What are the pros and cons of such a strategy for a firm?

    3.) The current economic conditions in the US have obviously resulted in continuing uncertainty. That being said, there have been a number of articles regarding the level of cash being held by major corporations. Many political leaders have criticized those in businesses that are holding large cash balances suggesting they should use the funds to expand and create jobs. The firms respond that the demand for their products is not there. What should companies do? If you were the CEO or the CFO of such companies, what would you recommend that would meet the needs of your constituents, shareholders, etc? What if the firm truly sees no need for the excess cash for the foreseeable future? What actions should they undertake that would benefit the suppliers of capital the most?

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    https://brainmass.com/business/capital-budgeting/financial-economic-guidance-515419

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    1). Many firms use the weighted average cost of capital for the firm as the hurdle rate when comparing to IRR or as the discount rate in an NPV calculation. However, there is an implicit assumption being made when one does that. What problems can one encounter or what errors may occur if one uses the WACC for evaluating all projects where the projects have significantly different risk exposures? Why?

    Risk is the possibility that a situation would not materialize as expected. In finance, risk is measured by the possibility that cash/investment would be lost or reduced. In net present value (NPV) and internal rate of return (IRR) analysis, a discount rate is applied to a project(s) in order to determine the acceptability of the project.

    Risk is different in many conditions. For example, the risk of a new business like a gold mine is different from that of an already established business like a Bakery. Similarly, risk is different depending on the sector that a company participates in.

    When project(s) are evaluated with the same discount rate/cost of capital there is potential that some projects would be declared unprofitable whereas its unique risks and returns are not similar to the company-wide cost of capital. Recall that from the last paragraph, it was explained about how risk can be different across projects. Similarly, if a single IRR value is used to evaluate all projects, some projects ...

    Solution Summary

    The expert examines financial and economic guidance. Why a firm is chosen to repurchase its stock is determined.

    $2.19

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