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Unformatted text preview: Web Appendix 12D Using the CAPM to Estimate the Risk-Adjusted Cost of Capital Answers to Questions 12D-1 If the firm used only the corporate WACC to evaluate projects, it would be more likely to accept the higher-risk projects with the higher returns (although they might not cover their appropriate cost) than the lower-risk projects with lower returns (even though these projects did in fact cover their costs). Consequently, the firm’s risk would increase as would its WACC because the firm would consist of a larger percentage of high-risk projects. If the firm’s required return increased without a corresponding increase in its expected returns then the firm’s value would decline. 12D-2 No this doesn’t mean that the CAPM/SML fail to hold. If a project’s return plots above the SML, it means that the firm’s expected return is more than enough to compensate for its risk, and the...
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This note was uploaded on 03/21/2010 for the course BUSINESS AB102 taught by Professor Woo during the Spring '10 term at Nanzan.
- Spring '10