The Costa Brava Corporation has each year similar numbers of low-risk, average-risk, and high-risk projects to consider for its annual capital budgeting. The WACC of Costa is curently estimated at 12%, which is the cost of capital used to discount projects of average risk.

Costa has just appointed a new CFO who argues that even though companys projects have different risks, the cost of capital for each project should be the same because the company obtains its capital from the same financing sources. Under this CFO, the following are possible scenarios that could happen over time.

Scenario I. The company will take on too many low-risk projects and reject too many high-risk projects.

Scenario II. The company will take on too many high-risk projects and reject too many low-risk projects.

Scenario III. Things will generally even out over time, therefore the risk of the firm should remain constant over time.

If the company follows the new CFOs advice, what is likely to happen over time?

Select one:

a. Scenarios I and III are most likely to occur.

b. Scenario III is most likely to occur.

c. Scenario II is most likely to occur.

d. Scenarios II and III are most likely to occur.

e. Scenario I is most likely to occur.