How Do Most Firms Deal with the Risks of Projects

question 59

Multiple Choice

How do most firms deal with the risks of projects when making capital budgeting decisions?

• A)Projects risks are not considered directly because the weighted average cost of capital (WACC) that is used as the required rate of return for capital budgeting decisions is based on the riskiness of the firm.As a result, all projects, no matter their risks, can be evaluated using WACC.
• B)Evaluating risk is important only when the projects are similar to the firm's existing assets.
• C)Most firms adjust the discount rates used to evaluate new projects that have significantly different risks than the risk associated with the firm's existing assets.
• D)Firms generally increase the required rate of return used to evaluate projects that have significantly different risks than the risk associated with the firm's existing assets, regardless of whether the new projects' risks are higher or lower.
• E)None of the above is a correct answer.

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Definitions:

Base Amount

A fundamental quantity or value from which other calculations or analyses are derived.

Business Segment

A distinct part of a company that focuses on a specific product or market sector, often with its own performance measurement.

Debt to Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity, indicating the proportion of equity and debt used to finance the company's assets.

Comparative Financial Statement

Financial statements that provide a comparison of a company's financial performance over multiple periods.