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The Impact of Risk on WACC

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?

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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 ...

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This discusses the Impact of Risk on WACC

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