If a project has a higher proportion of fixed to variable costs,holding the risk of its revenues constant:
A)its beta will be lower,hence its cost of capital will be lower.
B)its beta will be higher,hence its cost of capital will be higher.
C)its beta will be unaffected,since beta does not measure the sensitivity of the project's cash flows to market risk.
D)its financial leverage will be higher.

Question

Quizplus · Accepted Answer

A higher proportion of fixed costs means that the project's cash flows are more sensitive to changes in sales, which increases the project's market risk. Therefore, the project's beta will be higher, leading to a higher cost of capital.

If a Project Has a Higher Proportion of Fixed to Variable