Which of the following statements is correct?
A) If a new project is riskier than the firm's existing projects, then it should expect to be "charged" a higher cost of capital than the firm's overall WACC.
B) If a new project is riskier than the firm's existing projects, then it should expect to be "charged" a lower cost of capital than the firm's overall WACC.
C) The project's risk and the cost of capital to which it is compared are independent.
D) None of these choices are correct.

Question

Quizplus · Accepted Answer

The cost of capital is a reflection of the risk associated with a particular investment. If a new project is riskier than a firm's existing projects, it logically follows that the project would be "charged" a higher cost of capital to compensate for the increased risk. This is because investors will demand a higher return for taking on more risk, which in turn increases the project's cost of capital.

Which of the Following Statements Is Correct