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