Which of the following statements is true?
A) If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.
B) If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital.
C) If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital.
D) The new project's risk is not a factor in determining its cost of capital.

Question

Quizplus · Accepted Answer

Projects that are riskier than a firm's average project require a higher cost of capital to compensate for the increased risk. This aligns with financial theory, which states that the expected return (or cost of capital) should increase with an increase in risk to compensate investors for taking on additional risk.

Which of the Following Statements Is True