Question

If a company uses it's WACC as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects II. accept some negative net present value projects III. favor high risk projects over low risk projects IV. increase it's overall level of risk over time. A. I and III only B. III and IV only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV

Answer 1

Answer:

It is E

Explanation:

Each different project has different risk profile i.e business risk and finance risk. At such , these risks must be adjusted for to produce project specific cost of capital.

If a company is investing in another line of business with a different risk profile to the existing business, this will have an impact on the WACC to be used to assess the viability of the new project.

Likewise, if the new project is being financed with a mixed of capital different from the current finance structure, such will equally impact on the WACC to be used.