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Problem 1: A company has a WACC of 11%. It is in the business of selling fast food in North America. Now it has expansion plans to open up fast food restaurants in China. It expects to earn a return on this investment of 12%. Which of the following statements is true?
Option 1: It should decrease its cost of capital to a higher percentage to reflect its higher risk to decide whether or not to go forth with this investment in China.
Option 2: It should convert its WACC to a Chinese cost of capital by multiplying the WACC times an exchange rate.
Option 3: It should increase its cost of capital to a higher percentage to reflect its higher risk to decide whether or not to go forth with this investment in China.
Option 4: It should for sure ahead for sure with the expansion, since the return is higher than the cost of capital.
Option 5: The company should never consider a project of higher than normal risk.
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