Which one of the following statements is correct?
A) Firms should accept low-risk projects prior to funding high-risk projects.
B) Making subjective adjustments to a company's WACC when determining project discount rates unfairly punishes low-risk divisions within the company.
C) A project that is unacceptable today might be acceptable tomorrow given a change in market returns.
D) The pure play method is most frequently used for projects involving the expansion of a company's current operations.
E) Companies that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate.

Question

Quizplus · Accepted Answer

Market conditions and returns can change over time, making a project that was unacceptable before become acceptable in the future. This is why companies must regularly review their projects to determine their viability based on current market conditions. The other statements are incorrect. Firms should prioritize high-risk projects with high potential returns to drive growth. Subjective adjustments to the WACC may be necessary to account for differences in risk between divisions within a company. The pure play method is commonly used for projects outside of a company's current operations, and companies can adjust the pure play rate if they can provide a compelling rationale for doing so.

Which One of the Following Statements Is Correct