Question

Which one of the following statements is correct? Firms should accept low-risk projects prior to funding high-risk projects. Companies that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate. The pure play method is most frequently used for projects involving the expansion of a company's current operations. A project that is unacceptable today might be acceptable tomorrow given a change in market returns. Making subjective adjustments to a company's WACC when determining project discount rates unfairly punishes low-risk divisions within the company.

Answer 1

The correct statement is:

A project that is unacceptable today might be acceptable tomorrow given a change in market returns.

Step-by-step explanation:

The market returns determine the acceptability or otherwise of projects. Market returns cannot be accurately determined at the initial time of investment, except for fixed-income securities. It is possible that a project that is not accepted today because of its returns may become acceptable tomorrow because the market returns have turned positive. Market returns are not fixed for investments in corporate stocks.