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The Phil Dunphy Real Estate Company has an equal amount of low-risk projects, average- risk projects, and high-risk projects. The Phil Dunphy Real Estate Company
The Phil Dunphy Real Estate Company has an equal amount of low-risk projects, average- risk projects, and high-risk projects. The Phil Dunphy Real Estate Company estimates that the overall company's WACC (or weighted average cost of capital) is 12 percent. This is also the correct cost of capital for the company's average-risk projects. The company's CFO argues that, even though the company's projects have different risks, the cost of capital for each project should be the same because the company obtains its capital form the same sources. If the company follows the CFO's advice, what is likely to happen over time? A. The company will take on bad low-risk project and reject good high-risk projects. B. The company will take on bad high-risk projects and reject good low-risk projects. C. Things will generally even out over time, and therefore, the risk of the firm should remain constant over time D. Statements A and C are correct. E. Statements B and C are correct
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