If a firm uses its WACC as the discount rate for all of the projects it undertakes, then the firm will tend to favor low risk projects over high risk projects.

Question

Quizplus · Accepted Answer

Using the WACC as the discount rate for all projects does not adjust for the specific risk of individual projects. It assumes all projects have the same risk as the firm's average risk, potentially leading to incorrect valuation of both high and low risk projects.

If a Firm Uses Its WACC as the Discount Rate