Question

In perfect capital markets, using a company's cost of capital to evaluate a project is (a)...

In perfect capital markets, using a company's cost of capital to evaluate a project is (a) always correct. (b) always incorrect. (c) correct for projects that have average risk compared to the firm's other assets. (d) always correct and correct for projects that have average risk compared to the firm's other assets.

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Answer #1

The correct answer is option (c) correct for projects that have average risk compared to the firm's other assets.

The company's cost of capital must be used to evaluate a project whose risk is compared to that of the firm's other assets.

Options (a) and (b) is incorrect because it is not always correct or incorrect.

Option (d) is incorrect because it is not always correct.

Options (a), (b), and (d) are extreme statements with the use of word ALWAYS, which is usually incorrect.

It is correct ONLY when the risk of the project is comparable to that of the firm's other assets.

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