When we compute the cost of equity capital for a project we assume that the ________ of the project is equivalent to the average risk of the firm's investments.

Question

Quizplus · Accepted Answer

The cost of equity capital is calculated using the Capital Asset Pricing Model (CAPM), which considers the project's market risk (also known as systematic risk) by comparing it to the overall market risk. Therefore, when computing the cost of equity capital for a project, we assume that the market risk of the project is equivalent to the average risk of the firm's investments. Hence, option B is the correct choice.

When We Compute the Cost of Equity Capital for a Project