- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 5. Capital Investments and Capital Allocation
- Subject 3. Capital Allocation Principles and Pitfalls
CFA Practice Question
Using the company cost of capital to evaluate a project is ______.
B. always incorrect
C. correct for projects that are about as risky as the average of the firm's other assets
A. always correct
B. always incorrect
C. correct for projects that are about as risky as the average of the firm's other assets
Correct Answer: C
User Contributed Comments 5
| User | Comment |
|---|---|
| mtcfa | Wait I'm confused now. In the first section of the notes to this study session, it was written and there was a question stating that the WACC of the company should be used to discount all projects, no matter what their risk. Now it seems like we're completely reversing that premise. |
| fuado | who said so, mtcfa? I cannot find it anywhere in the notes. WACC is used to evaluate the company. If a project is risker than the company itself, the you should use a rate higher than calculated WACC. It makes sense. |
| janinec | @ mtcfa: The WACC (i.e. weighted average cost of capital) is the company's cost of capital. |
| viruss | if you are going to undertake a projet really more risky than your actual activities, it makes sense to use a cost of capital higher than the wacc right ? |
| Kiniry | That is correct, viruss |