Suppose a firm uses its company's cost of capital to evaluate all projects. Will it underestimate or overestimate the value of high-risk projects?
High risk projects should use a higher WACC than the company's standard WACC. By using a lower WACC, the firm will overestimate the value of these projects and will end up selecting them when it should not.
Risk-averse investors expect a higher rate of return for higher risk project, to ...
This solution provides a concise explanation for using Cost of Capital in 122 words.