18. Fudge factors (S9.3) Mario Barleycorn estimates his firm’s company cost of capital at only 8%. Nevertheless, he sets a 15% companywide discount rate to offset the optimistic biases of project sponsors and to impose “discipline” on the capital budgeting process. Suppose Mr.

Barleycorn is correct about the project sponsors, who are, in fact, optimistic by 7% on average.

Explain why the increase in the discount rate from 8% to 15% will not offset the bias.

(Note: The firm is entirely equity financed.)