10 Questions
Which of the following is true about risky projects?
Risky projects require higher rates of return.
What is the benchmark risk-adjusted discount rate for new investments?
The company cost of capital.
How is the company cost of capital estimated?
As the weighted-average cost of capital.
When is the opportunity cost of capital greater than the company cost of capital?
For riskier projects.
What do smart financial managers do when evaluating risky projects?
They adjust for risk in capital budgeting.
Why do smart financial managers demand higher rates of return from risky projects?
To align with conservative forecasts of project cash flows
What is the benchmark risk-adjusted discount rate for new investments based on?
The company's cost of capital
How is the company cost of capital usually estimated?
As the weighted-average cost of capital
When is the opportunity cost of capital greater than the company cost of capital?
For riskier projects
What is the relationship between the value of risky projects and safe projects, according to the text?
Risky projects are less valuable than safe ones
Test your knowledge on risk and the cost of capital with this quiz. Learn about the relationship between risk and return in capital budgeting and how financial managers adjust for risk. Challenge your understanding of why risky projects require higher rates of return and how this affects decision-making.
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