A company is considering investing in a project that requires the company to take on risks...

A company is considering investing in a project that requires the company to take on risks outside of the company's current scope. As a result, which of the following things will happen?

Select one:

a. The company's stock value would drop unless the project increase the company's expected returns.

b. The company does not have to recalculate its WACC to evaluate the project.

c. All of these things.

d. The project would decrease the company's cost of equity.

Solutions

Expert Solution

Correct answer is option : a>The company's stock value would drop unless the project increase the company's expected returns.

Since risk is outside the company's current scope and therefore company need to compute the revised WACC. unless the project generate expected return share price will drop.

we cant say whether cost of capital will decrease or increase. Based on information provided in question if risk is out of scope cost of capital should increase.

Hence, correct answer is option : The company's stock value would drop unless the project increase the company's expected returns.

jeff jeffy answered 1 year ago

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