Purchase Solution

The Impact of Risk on WACC

Not what you're looking for?

Ask Custom Question

The Nunnally Company has equal amounts of low-risk, and high-risk projects. Nunnally estimates that is 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 higher rate for higher risk projects. However, the CEO argues that even though the company's 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 opinion is followed, what is likely to happen over time?

Purchase this Solution
Solution Summary

This discusses the Impact of Risk on WACC

Solution Preview

The Nunnally Company has equal amounts of low-risk, and high-risk projects. Nunnally estimates that is 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 higher rate for higher risk projects. However, the CEO argues that even though the company's 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 opinion is followed, what is likely to happen over time?

The WACC is simply the cost of the several types of capital (called ...

Purchase this Solution
Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

View More Free Quizzes
Related BrainMass Solutions

  • Finance: WACC, capital budgeting etc

    Shareholder Risk: This possibility that an investment would increase the associated risk to shareholders The problems deal with issues in finance WACC, capital budgeting, etc. The impact WACC has on capital budgeting and structure is determined.

  • Weighted Average Cost of Capital (WACC)

    A analysis of the use of WACC as the appropriate discount rate along with its impact on raising long term capital is presented.

  • Projects with different risks

    In the same way a low risk project which should be evaluated using a lower discounting rate is evaluated using WACC which is higher and so the project may get rejected. The solution explains impact of accepting projects with different risks

  • Discuss factors impacting WACC

    The solution discusses the factors that impact WACC.

  • Alternative capital structures and impact on debt ratio

    In other words, higher amounts of debt raise the financial risk of a company, and this risk is reflected on the cost of all the types of capital the company uses.

  • Impact of WACC on capital budgeting and structure

    Corporate finance by Brealy & Myers This discusses the impact of WACC on capital budgeting and structure

  • firm's business risk

    IF the business risk is increasing then it will impact on the financial risk also as the overall risk of the organization will increase.

  • Forecasts, yield curve, weighted average cost, WACC

    349607 Forecasts, yield curve, weighted average cost, WACC 1) Point-estimate exchange rate forecasts cannot adequately account for the potential impact of exchange rate fluctuations True or False 2) Country risk can be used: I. to monitor countries

  • Determining: The Debt Equity Mox

    What are the effects of a corporate tax on the WACC of a business? Is minimizing WACC by having a largely debt-based capital structure a high risk strategy, given the threat of bankruptcy in an overleveraged business?

View More Related Solutions