If a typical U.S. company uses the same discount rate to evaluate all projects, the firm will most likely become
A) Riskier over time, and its value will decline.
B) Riskier over time, and its value will rise.
C) Less risky over time, and its value will rise.
D) Less risky over time, and its value will decline.
E) There is no reason to expect its risk position or value to change over time as a result of its use of a single discount rate.

Question

Quizplus · Accepted Answer

If a company uses the same discount rate to evaluate all projects, it is not taking into account the varying levels of risk associated with each project. As a result, the company may be taking on riskier projects that have a lower present value (due to the higher risk) than it appears, or passing over less risky projects with higher present values (due to the lower discount rate). Over time, this can lead to the company gradually taking on more risk and becoming riskier overall, which will ultimately lead to a decline in its value.

If a Typical U