Using the weighted average cost of capital as the required rate of return for every project will
A) cause a firm to reject projects that should have been accepted.
B) cause a firm to accept projects that were too risky.
C) result in maximization of shareholder wealth.
D) A and B above

Question

Quizplus · Accepted Answer

Using the weighted average cost of capital (WACC) as the required rate of return for every project can lead to incorrect decisions. Projects that are riskier than the firm's average risk might be accepted because their risk is not properly accounted for in the WACC, and projects that are less risky might be rejected because their returns, although safe, might not meet the WACC threshold. This approach does not always lead to the maximization of shareholder wealth.

Using the Weighted Average Cost of Capital as the Required