Cost of capital for projects with different risks

Related BrainMass Solutions

• Should a firm use the same cost of capital for all its investments?

  For example a company may have two projects one with very little risk but other with higher risk. Then firm should use different cost of capital for these two projects.

• Cost of capital

  So we need to adjust the segment cost of capital to the differences in the risks of the project. For this purpose we can use the rough and ready method and add 2% to projects with higher risk and subtract 2% for projects with lower risk.

• A company has an equal number of low-risk projects, average-risk projects, and high-risk projects

  The company's CFO argues that, even though the company's projects have different risks, the cost of capital for each project should be the same because the company obtains its capital from the same source.

• Risk in Capital projects: What analyses would you request?

  How can you adjust for risk in capital projects? Every capital project entails several risks associated with it. Capital projects are evaluated using the firm's cost of capital.

• Capital Project Analysis, Market, WACC, Cost of Capital

  The reason that this is a correct statement is because using the same WACC to evaluate all projects with different risk will result in the company potentially favoring riskier projects, which will result in greater risks overtime as an increasing WACC

• Divisional Cost of Capital Approach vs Weighted Average Cost of Capital

  However, if a project has above average risks and its capital structure is different from the company, then the WACC is not the appropriate measure. Using the divisional cost of capital might be better.

• The Impact of Risk on WACC

  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.

• Projects with different risks

  The solution explains impact of accepting projects with different risks

• Cost of Capital Pfizer

  It is a commonly used approach for determining the cost of capital assuming that financial risks, business risks and dividend policy with the consideration of changes in economy and respective industry.