Under which of the following conditions is it appropriate to estimate a project's cost of capital using the company's cost of capital?
A)When a company is a diversified conglomerate.
B)When the systematic risk of a project is similar to that of some other divisions.
C)When a company operates in a sole industry.
D)When a company operates in more than one industry but less than five.

Question

Quizplus · Accepted Answer

When a company operates in a sole industry, the systematic risk of any project it undertakes is likely to be similar to the company's overall systematic risk. Therefore, using the company's cost of capital to estimate a project's cost of capital is appropriate because the risk profile of the project aligns closely with that of the company as a whole.

Under Which of the Following Conditions Is It Appropriate to Estimate