Question
If a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept Blank______ projects.
Multiple choice question.
the optimal number of
too many high-risk
only profitable
Multiple choice question.
the optimal number of
too many high-risk
only profitable
Answers
GPT-4o mini
If a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept **too many high-risk** projects.
Using the overall cost of capital, which typically reflects a lower average risk, could lead the firm to underestimate the risk premium required for higher-risk investments, resulting in the acceptance of riskier projects that may not actually be worthwhile.
Using the overall cost of capital, which typically reflects a lower average risk, could lead the firm to underestimate the risk premium required for higher-risk investments, resulting in the acceptance of riskier projects that may not actually be worthwhile.