FIN 534 RANK Imagine Your Future /fin534rank.com FIN 534 RANK Imagine Your Future /fin534rank.com - Page 126
Which of the following statements is CORRECT?
The MacMillen Company has equal amounts of low-risk,
average-risk, and high-risk projects. The firm's overall WACC is 12%.
The CFO believes that this is the correct WACC for the company’s
average-risk projects, but that a lower rate should be used for lower-risk
projects and a higher rate for higher-risk projects. The CEO disagrees,
on the grounds that even though 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. If the CEO’s
position is accepted, what is likely to happen over time?