Section B Short Answer Questions 30 marks. Theory explanation and discussion

In this second section, you are required to answer the following questions:

The application of WACC to evaluate all projects may lead managers into accepting high-risk projects that do not compensate adequately for risk and into rejecting low-risk projects that compensate fully for the level of risk but may not have particularly high rates of return. Describe the situations when using a WACC is not appropriate and how these incorrect decisions may be made. (Hint: Use real life situation to explain your answer.) (10 marks)