Assigning discount rates to individual projects based on the risk level of each project:
A) may cause the company's overall weighted average cost of capital to either increase or decrease over time.
B) will prevent the company's overall cost of capital from changing over time.
C) will cause the company's overall cost of capital to decrease over time.
D) decreases the value of the company over time.
E) negates the company's goal of creating the most value for its shareholders.

Question

Quizplus · Accepted Answer

Assigning different discount rates to individual projects based on their risk level may affect the overall weighted average cost of capital of the company. If more risky projects are assigned higher discount rates, the overall cost of capital may increase. Conversely, if less risky projects are assigned lower discount rates, the overall cost of capital may decrease. Therefore, assigning different discount rates can lead to changes in the overall cost of capital over time.

Assigning Discount Rates to Individual Projects Based on the Risk