Rather than focusing on risk from an investors’ decision-making perspective, consider the risk of corporate decisions and how investors’ perceptions affect the “true risk” of corporate decisions.

a. Why is it important for operating managers to be cognizant of the way investors look at risk?

b. Suppose a particular decision appears particularly risky to investors (for instance, it would make the firm look risky), but the firm’s managers, who know more about the situation than investors, think the decision is really not very risky. How might this situation affect the decision to accept a particular project based on each of the following factors?

(1) The project can be financed with internal funds; therefore, the firm does not need to sell securities to undertake the project.

(2) The project is very large, and securities must be sold to finance it.

(3) The project is long-term; therefore, it will take years for the company to complete the project and begin receiving cash flows.

(4) The project is short-term, so the company can complete it and receive cash flows within a few months.