Firms should adjust for execution risk by:
A)assigning a higher cost of capital to new projects.
B)ignoring execution risk since it is diversifiable.
C)capturing this risk in the expected cash flows generated by the project.
D)noticing missteps in the firm's execution of new projects.

Question

Quizplus · Accepted Answer

Capturing execution risk in the expected cash flows generated by the project is the best option. By doing so, firms can accurately reflect the potential risks and uncertainties associated with a new project, which can help inform decision-making and resource allocation. Assigning a higher cost of capital may be an option, but it does not necessarily capture the specific risks associated with execution. Ignoring execution risk is not advisable, as it can lead to significant issues down the line. Noticing missteps in execution is also important, but it is not a proactive solution that the firm can implement to address the issue.

Firms Should Adjust for Execution Risk By