Final answer:
Financial managers may use a higher cost of capital in response to a significant increase in business risk or increased market competition.
Step-by-step explanation:
When a financial manager is prompted to use a higher cost of capital, it means they need to increase the required rate of return on investment. One reason for this could be A significant increase in business risk. This means that the financial manager perceives higher risk in the company's projects or investments, and therefore, demands a higher return to compensate for that risk. Another reason could be Increased market competition. In a highly competitive market, the financial manager may need to use a higher cost of capital to ensure the company remains competitive and earns a satisfactory return.