6. Within-firm risk and beta risk Aa Aa Understanding risks that affect projects
ID: 2780571 • Letter: 6
Question
6. Within-firm risk and beta risk Aa Aa Understanding risks that affect projects and the impact of risk consideration WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company's projects tends to vary a great deal from project to project. If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The fim could potentially reject projects that provide a higher rate of return than the company should require. The firm's overall risk level will increase. The firm will increase in value. When a project involves an entirely new product line, the firm may be able to obtain betas from to calculate a weighted average cost of capital (WACC) for its new product line.Explanation / Answer
If firm does not risk adjust its discount rate properly, then
The firm could potentially reject projects that provide a higher rate of return and it's overall risk will increase.
Answer will be 1 and 2.
When a project involes entirelu new product line, the firm may use previous related projects to calculate WACC for its new project.
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