Suppose Acme Industries correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely
A) become less risky over time, and this will maximize its intrinsic value.
B) accept too many low-risk projects and too few high-risk projects.
C) become more risky and also have an increasing WACC.Its intrinsic value will not be maximized.
D) continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.
E) become riskier over time, but its intrinsic value will be maximized.

Question

Quizplus · Accepted Answer

The use of a single cost of capital for evaluating all projects over a period of 10 years assumes that the firm's risk position will remain constant over that period of time, which is unlikely to be the case. As the firm takes on new projects, it may become more or less risky, and its WACC may change accordingly. By using a single cost of capital, the firm may end up accepting projects that are not truly value-maximizing, which could ultimately decrease the firm's intrinsic value. Over time, as the firm's risk position changes and its WACC increases, the firm may become more risky, which will also decrease its intrinsic value.

Suppose Acme Industries Correctly Estimates Its WACC at a Given