When a project being valued is riskier than the average asset in the firm, the firm's cost of capital should be adjusted downwards to reflect this increased risk.

Question

Quizplus · Accepted Answer

When a project is riskier than the average asset in the firm, the firm's cost of capital should be adjusted upwards to reflect this increased risk. Higher risk projects are expected to generate higher returns to compensate for the additional risk, which is reflected in the higher cost of capital.

When a Project Being Valued Is Riskier Than the Average