Which of these may occur if a company uses its overall cost of capital as the discount rate for all projects? I.Profitable low-risk projects may be incorrectly rejected.
II)Only projects with risks similar to the current company will be accepted.
III)Too many high-risk projects may be accepted.
IV)Only low-risk projects will be accepted.

Question

Quizplus · Accepted Answer

If a company uses its overall cost of capital as the discount rate for all projects, it may mistakenly reject profitable low-risk projects (I) and accept too many high-risk projects (III). Option II is not relevant to the situation at hand as it talks about only accepting projects similar to the current company's risk profile. Option IV is incorrect as it implies that only low-risk projects will be accepted, which is not necessarily the case.

Which of These May Occur If a Company Uses Its