If a company assigns the same cost of capital to all of its projects regardless of...
If a company assigns the same cost of capital to all of its projects regardless of each project's risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject. Why do you think this is a correct statement?
Homework Answers
This statement is correct because the cost of capital is the cost of the firm as a whole and may not match the risk of a particular project. So, if the firm is riskier than the project being taken, then the project which is less risky is rejected because the return generated from it would be less than cost of capital, and project which is more riskier are accepted because the cost of capital is less than the return it would generate.
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If a company assigns the same cost of capital to all of its
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