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problems with using the same company-wide cost of capital for all projects include: a. biasing project...

problems with using the same company-wide cost of capital for all projects include:
a. biasing project selection towards high-risk, high return projects
b. rejection of worthwhile low risk projects
c. spending an unjustified amount of managerial time to justify a lower cost of capital so the pet projects will be accepted
d. both a and b
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Answer #1

Suppose the company's WACC is 10% and the additional Project's WACC is 14%

If the Project's IRR comes out to be 12% and if we use the company's WACC then we will be biased in selecting that project and if we use the project's WACC then we will not reject it

So, option a is correct

Now, suppose, the company's WACC is 10% and the additional Project's WACC is 6%

If the Project's IRR comes out to be 8% and if we use the company's WACC then we will reject that project and if we use the project's WACC then we will not reject it

So, option b is also correct

Hence, option D is the correct answer

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