Holding risk constant, the implementation of projects with a rate of return above the cost of capital will decrease the value of a firm, and vice versa.

Question

Quizplus · Accepted Answer

This statement is incorrect. The implementation of projects with a rate of return above the cost of capital will increase the value of a firm, as it generates positive net present value (NPV) and increases shareholders' wealth. Conversely, projects with a rate of return below the cost of capital will decrease the value of a firm, as they generate negative NPV and destroy shareholders' wealth. Holding risk constant, the relationship between the net present value and the cost of capital is inverse; that is, as the cost of capital increases, the net present value decreases, and vice versa.

Holding Risk Constant, the Implementation of Projects with a Rate