The McCue Company Has Equal Amounts of Low-Risk,average-Risk,and High-Risk Projects

question 83

Multiple Choice

The McCue Company has equal amounts of low-risk,average-risk,and high-risk projects.McCue estimates that its overall WACC is 12%.The CFO believes that this is the correct WACC for the company's average-risk projects,but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects.The CEO disagrees on the grounds that,even though projects have different risks,the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources.If the CEO's position is accepted,what is likely to happen over time?

• A)The company will take on too many high-risk projects and reject too many low-risk projects.
• B)The company will take on too many low-risk projects and reject too many high-risk projects.
• C)Things will generally even out over time, and therefore the firm's risk should remain constant over time.
• D)The company's overall WACC should decrease over time because its stock price should be increasing.

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Definitions:

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The amount of a product or service produced per million British Thermal Units of energy consumed.

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An English economist and demographer known for his theory that population growth would outstrip food supply, leading to poverty and famine.

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