Solutions to Web Appendix 12D

Solutions to Web Appendix 12D - Web Appendix 12D Using the...

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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 firms risk would increase as would its WACC because the firm would consist of a larger percentage of high-risk projects. If the firms required return increased without a corresponding increase in its expected returns then the firms value would decline. 12D-2 No this doesnt mean that the CAPM/SML fail to hold. If a projects return plots above the SML, it means that the firms expected return is more than enough to compensate for its risk, and the...
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Solutions to Web Appendix 12D - Web Appendix 12D Using the...

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