Chapter 12-Web Appendix 12C Solutions

Chapter 12-Web Appendix 12C Solutions - WebAppendix12C...

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Web Appendix 12C Using the CAPM to Estimate the Risk-Adjusted Cost of Capital Answers to Questions 12C-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. 12C-2 No this doesn’t mean that the CAPM/SML fail to hold.  If a project’s return plots above the SML, it 
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