Which of the following statements is correct?
A)If a new project is riskier than the firm's existing projects, then it should be expect to be "charged" a higher cost of capital than the firm's overall WACC.
B)If a new project is riskier than the firm's existing projects, then it should be expect to be "charged" a lower cost of capital than the firm's overall WACC.
C)The project's risk and the cost of capital to which it is compared are independent.
D)None of these answers is correct.

Question

Quizplus · Accepted Answer

According to the principle of risk-return trade-off, riskier projects are expected to have higher cost of capital than less risky projects. Therefore, if a new project is riskier than the firm's existing projects, it should be expected to be "charged" a higher cost of capital than the firm's overall WACC. Option B is incorrect because a riskier project doesn't warrant a lower cost of capital. Option C is incorrect because the project's risk and the cost of capital to which it is compared are not independent but are positively correlated. Option D is incorrect as option A is the correct answer.

Which of the Following Statements Is Correct