Asked by
Sidra Javed
on Dec 09, 2024
Verified
Suppose a firm uses a constant WACC in determining the value of capital budgeting projects rather than using the security market line. The firm will tend to _____________________.
A) Accept profitable, low risk projects and reject unprofitable, high risk projects.
B) Accept profitable, low risk projects and accept unprofitable, high risk projects.
C) Reject unprofitable, high risk projects.
D) Become more risky over time.
E) Accept profitable, low risk projects.
Security Market Line
A graphical representation in the Capital Asset Pricing Model (CAPM) that displays the expected return of an investment as a function of its beta, or systematic risk.
Risky Projects
Initiatives or investments that carry a high level of uncertainty or likelihood of not achieving the expected financial returns.
- Learn the necessary conditions to employ a business's weighted average cost of capital (WACC) as the discount rate for project assessments.
- Identify the importance of risk in the assessment of projects and its effect on the cost of capital.
Verified Answer
AK
Learning Objectives
- Learn the necessary conditions to employ a business's weighted average cost of capital (WACC) as the discount rate for project assessments.
- Identify the importance of risk in the assessment of projects and its effect on the cost of capital.