The company will dismiss worthwhile, low-risk projects. The company will take on risky, subpar initiatives
The required return on the current firm assets is known as the cost of capital. It is founded on asset risk.
The weighted average risk of the firm's debt, preferred stock, and common equity is equal to the risk of the total assets of the company.
A company's cost of capital is equal to the weighted average of its costs for debt, preferred stock, and common equity.
Since every project has a unique risk profile, employing a single cost of capital to evaluate all projects could produce false findings, causing an investor or business to approve high-risk initiatives or reject low-risk ones.
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