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Using a Company's Cost of Capital to Evaluate All Projects

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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?

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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 ...

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This solution provides a concise explanation for using Cost of Capital in 122 words.

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