Which of these may occur if a firm uses its overall cost of capital as the discount rate for all projects?
I.Profitable low-risk projects may be incorrectly rejected.
II.Only projects with risks similar to the current firm will be accepted.
III.Too many high-risk projects may be accepted.
IV.Only low-risk projects will be accepted.

Question

Quizplus · Accepted Answer

Using the overall cost of capital as the discount rate for all projects can lead to incorrect rejection of profitable low-risk projects (I) and acceptance of too many high-risk projects (III). It may also result in only low-risk projects being accepted (IV) because projects with risks similar to the current firm (II) are favored. Therefore, the best choice is C, which includes options I and III only.

Which of These May Occur If a Firm Uses Its