A ﬁrm that uses its WACC as a cutoff without considering project risk will likely see its WACC rise
over time.

Question

Quizplus · Accepted Answer

If a firm consistently uses its WACC as a cutoff for capital budgeting and does not account for project risk, it will likely choose riskier projects over time. This will subsequently lead to a higher overall level of risk for the firm, causing investors to require a higher rate of return and in turn, increasing the WACC.

A ﬁRm That Uses Its WACC as a Cutoff Without