True, False, or Uncertain: "If a firm accepts only projects that are expected to return its
weighted average cost of capital or higher, the firm will become riskier over time."
Explain.

Question

Quizplus · Accepted Answer

In order to earn a return equal to the firm's weighted average cost of capital, the firm will need to invest in average risk projects. To earn a return greater than its weighted average cost of capital, the firm will need to invest in projects that have greater-than-average risk. The firm would never invest in projects with below-average risk. Given that the firm's market beta is the weighted average beta of all these projects, the firm will be increasing its risk as it invests in higher-beta projects.

True, False, or Uncertain: "If a Firm Accepts Only Projects