Which of the following statements is correct?
A)Capital budgeting projects with fairly risky cash flows should be evaluated using relatively high discount rates (required rates of return).
B)If managers want to maximize the firm's stock value, they should not be concerned with risk when making capital budgeting decisions.
C)If a firm evaluates all capital budgeting projects using its existing required rate of return, its overall risk, as measured by its beta coefficient, probably will decline over time.
D)If a firm has a beta coefficient that is less than 1.0, its existing required rate of return will be negatively correlated with the returns on most of the capital budgeting projects it evaluates in the future.
E)A firm should use a different approach to estimate the riskiness of mutually exclusive projects than it uses to estimate the riskiness of independent projects.

Question

Quizplus · Accepted Answer

Capital budgeting projects with riskier cash flows should be evaluated using higher discount rates (required rates of return) as these projects carry more uncertainty and hence more risk.

Note: 
B is incorrect as considering risk is essential for maximizing stock value. 
C is incorrect as the beta coefficient of a firm may not necessarily decline over time just because it evaluates all capital budgeting projects using its existing required rate of return. 
D is incorrect as a beta coefficient less than 1.0 means the project is less risky than the overall market, and its existing required rate of return will be lower. 
E is incorrect as a similar approach can be used for both mutually exclusive and independent projects to estimate their riskiness.

Which of the Following Statements Is Correct