The risk-adjusted discount rate approach is preferable to the weighted cost of capital approach when ______.
A) all projects have the same risk characteristics
B) the risk-free rate is known with certainty
C) the projects under consideration have different risk characteristics
D) the firm is unlevered

Question

Quizplus · Accepted Answer

The risk-adjusted discount rate approach is preferable when projects have different risk characteristics. This approach takes into account the specific risk of each project and adjusts the discount rate accordingly, allowing for a more accurate evaluation of the project's net present value. The weighted cost of capital approach assumes that all projects have the same risk characteristics, which may not be the case. Therefore, the risk-adjusted discount rate approach is more accurate when projects have different levels of risk.

The Risk-Adjusted Discount Rate Approach Is Preferable to the Weighted