CFA Practice Question

CFA Practice Question

Which one of the following does NOT describe the optimal capital budget for a firm?
A. The amount of new capital required to undertake all projects the riskiness of whose cash flows is lower than the riskiness of the cash flows of the average firm.
B. The amount of new capital required to undertake all projects whose IRR (normal cash flows) exceeds the marginal cost of new capital.
C. The amount of new capital required to undertake all positive NPV projects, where the discount rate is the firm's marginal cost of new capital.
Explanation: While less riskiness is valuable, expected value is also important. Sticking your money under the mattress may result in low risk (only inflation risk), but the expected return is unacceptable.

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