Chapter 13, Problem 1CQ

Project Risk If you can borrow all the money you need for a project at 6 percent, doesn’t it follow that 6 percent is your cost of capital for the project?

Summary Introduction

To determine: The respond to the given statement.

Introduction:

The cost of capital is the WACC (Weighted Average Cost of Capital) is the total rate of return for a company which anticipates reimbursing all their investors. It is considered as a financing resource in the target capital structure of a company and it measured in terms of weights of fractions.

Explanation of Solution

Statement: If money borrowed at 6% doesn’t it follow that 6% percent as cost of capital for the project?

“No the statement is false”

Reason:

Because the cost of capital of a project is based on the riskiness of a project. Additionally the origin of money will not considered as cost of capital.