Risk and the Cost of Capital
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Questions and Answers

Which of the following is true about risky projects?

  • Risky projects have the same risk as the company's overall business.
  • Risky projects require higher rates of return. (correct)
  • Risky projects are more valuable than safe ones.
  • Smart financial managers do not consider risk when evaluating projects.

    • What is the benchmark risk-adjusted discount rate for new investments?

  • The company cost of capital. (correct)
  • The average rate of return demanded.
  • The rate of return on safe projects.
  • The opportunity cost of capital.

    • How is the company cost of capital estimated?

  • As the rate of return on risky projects.
  • As the weighted-average cost of capital. (correct)
  • As the average rate of return demanded.
  • As the rate of return on safe projects.

    • When is the opportunity cost of capital greater than the company cost of capital?

    <p>For riskier projects.</p> Signup and view all the answers

    What do smart financial managers do when evaluating risky projects?

    <p>They adjust for risk in capital budgeting.</p> Signup and view all the answers

    Why do smart financial managers demand higher rates of return from risky projects?

    <p>To align with conservative forecasts of project cash flows</p> Signup and view all the answers

    What is the benchmark risk-adjusted discount rate for new investments based on?

    <p>The company's cost of capital</p> Signup and view all the answers

    How is the company cost of capital usually estimated?

    <p>As the weighted-average cost of capital</p> Signup and view all the answers

    When is the opportunity cost of capital greater than the company cost of capital?

    <p>For riskier projects</p> Signup and view all the answers

    What is the relationship between the value of risky projects and safe projects, according to the text?

    <p>Risky projects are less valuable than safe ones</p> Signup and view all the answers

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