CFA Practice Question

There are 131 practice questions for this study session.

CFA Practice Question

Suppose Ready Lock Inc. uses a constant WACC in determining the value of capital budgeting projects rather than using the security market line. Ready Lock Inc. will tend to

A. reject unprofitable, high risk projects
B. accept profitable, low risk projects and reject unprofitable, high risk projects
C. accept profitable, low risk projects
D. accept profitable, low risk projects and accept unprofitable, high risk projects
E. become more risky over time
Correct Answer: E

User Contributed Comments 3

User Comment
ceekay will tend to accept profitable high-risk and low-risk projects. But since, high-risk projects will look more "profitable"(due to their higher rate of return), firm will become more risky over time.
kodali The approach doesn't concider the risk premium and hence the company goes after High risk, High Return projects and becomes risky in general
vi2009 The company does not evaluate individual project risk, instead uses same rate (company WACC) for all project types. It does not adhere to the SML which determines return for risk it undertakes. Therefore it may reject projects that may be good & accept project that may not be good ... as a result of which, it becomes more risky as a company
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