Which of the following statements is correct?
A)If a new project is riskier than the firm's existing projects, then it should be 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 be 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 answers are correct.

Question

Quizplus · Accepted Answer

According to the concept of risk and return trade-off, riskier investments should generate higher returns to compensate for the additional risk involved. Therefore, if a new project is riskier than the firm's existing projects, it should be expected to generate a higher return. This means that the cost of capital required for the project should be higher than the firm's overall WACC.

Which of the Following Statements Is Correct