The problem of using the overall firm's beta in discounting projects of different risk is the:
A)firm would accept too many high-risk projects.
B)firm would reject too many low risk projects.
C)firm would reject too many high-risk projects.
D)firm would accept too many low risk projects.
E)Both A and B.

Question

Quizplus · Accepted Answer

Using the overall firm's beta for all projects assumes all projects have the same risk as the firm, leading to underestimating the risk of high-risk projects (accepting too many) and overestimating the risk of low-risk projects (rejecting too many).

The Problem of Using the Overall Firm's Beta in Discounting