The company cost of capital is the correct discount rate only for investments that have the same risk as the company's overall business.

Question

Quizplus · Accepted Answer

The company cost of capital is calculated based on the weighted average of the cost of equity and the cost of debt. This rate reflects the overall risk of the company, including both systematic and unsystematic risks. Therefore, it is the appropriate discount rate for investments that have the same risk as the company's overall business. However, for investments that have different risks from the company's overall business, a different discount rate may be more appropriate.

The Company Cost of Capital Is the Correct Discount Rate