If a firm uses a constant WACC to select investments projects, it will:

Question

Quizplus · Accepted Answer

Using a constant WACC for evaluating projects with different risk profiles can lead to inappropriate investment decisions. This is because the WACC should be adjusted to reflect the specific risk of each project. Using a constant WACC might result in accepting high-risk projects that do not offer sufficient returns or rejecting low-risk projects that could be beneficial. Such misallocation of capital can negatively impact the firm's valuation, potentially causing the market price of its debt and equity securities to decline.

If a Firm Uses a Constant WACC to Select Investments