Kelly's uses the firm's WACC as the required return for some of its projects.For other projects,the firms uses a rate equal to WACC plus 1 percent,while another set of projects is assigned rates equal to WACC minus some amount.Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning the project a discount rate?

Question

Quizplus · Accepted Answer

The risk level of the project should be the key factor to determine the amount of adjustment to the discount rate. Projects with higher risk should have a discount rate higher than WACC, while projects with lower risk can have a discount rate lower than WACC. Factors such as firm beta, date for project commencement, division within the firm, or current debt-equity ratio may be relevant but do not necessarily determine the risk level of the project.

Kelly's Uses the Firm's WACC as the Required Return for Some