Using the WACC to evaluate all projects may lead managers into accepting high-risk projects that do not compensate adequately for risk and into rejecting low-risk projects that compensate fully for the level of risk but may not have particularly high rates of return. Describe the situations when using a WACC is not appropriate and how these incorrect decisions may be made.
1.Describe why firms in the airline industry have so much debt compared to other industries. What industry has the lowest profit margin? What industry converts the greatest amount of sales dollars into profit?
2.What is an incremental cash flow for a project? What concepts do we need to examine to help understand how to estimate the incremental cash flow of a project? What else is needed for deciding on whether or not to choose a project?
3.Most companies do not have the resident expertise to complete an initial public offering (IPO), so they hire an investment banker to help accomplish the sale. Describe three significant tasks that an investment banker provides.
4. Describe the relationship between the yield to maturity and the coupon rate of a bond.