ECONOMICS
RISK AND RETURN
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the type of assets (current or fixed) used in the project
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the interest rate on the company’s outstanding long-term bonds
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the type of security issued to finance the project
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the risk associated with the project
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Detailed explanation-1: -The answer is: False. The cost of capital depends on the risk of the company’s cash flows, not the riskiness of the project. The cash flows created by the project may be risky, but the cost of capital is a function of the opportunity cost associated with the company’s current operations and financial position.
Detailed explanation-2: -The project cost of capital depends on the use to which that capital is put. Therefore, it depends on both the risk of the project and also on the risk of the company.
Detailed explanation-3: -A company’s cost of capital depends, to a large extent, on the type of financing the company chooses to rely on – its capital structure. The company may rely either solely on equity or solely on debt or use a combination of the two.
Detailed explanation-4: -The cost of capital depends primarily on the use of funds, not the source.
Detailed explanation-5: -corporate risk. international risk (including currency risk) industry-specific risk. market risk. stand-alone risk. project-specific risk. 23-Dec-2021