Which one of the following statements is correct?
A)Firms should accept low risk projects prior to funding high risk projects.
B)Making subjective adjustments to a firm's WACC when determining project discount rates unfairly punishes low-risk divisions within a firm.
C)A project that is unacceptable today might be acceptable tomorrow given a change in market returns.
D)The pure play method is most frequently used for projects involving the expansion of a firm's current operations.
E)Firms that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate.

Question

Quizplus · Accepted Answer

Market conditions are constantly changing, and what may be an unacceptable project today may become acceptable in the future. Therefore, firms should regularly re-evaluate their project portfolio and consider re-submitting previously rejected projects at a later time when market conditions change. Option A is incorrect because firms should evaluate and fund projects based on their overall risk and return profile, not just their risk level. Option B is incorrect because adjusting the WACC to reflect a project's risk level is a fair practice, and not doing so puts low-risk divisions at a disadvantage. Option D is incorrect because the pure play method is most often used for projects in unrelated industries. Option E is incorrect because firms can make subjective adjustments to the pure play rate, as long as they clearly justify their reasoning.

Which One of the Following Statements Is Correct