Define and discuss the different dimensions (or aspects) of risk in the context of corporate projects. Which is the most relevant for investors? Of these dimensions, which is the company most likely to focus on and why?

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Hubert KochLv2

17 Oct 2018

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Distinguish between beta(i.e market) risk, within-firm( i.e,corporate) risk, and stand-alone risk for a potential project. Of the three measures, which is theoretically the most relevant, and why? Suppose a firm estimates its overall cost of capital for the coming year to be 10%. What might be reasonable costs of capital for average-risk, high-risk, and low-risk project?

raspberrydinosaur630

Firms raise capital at the total corporate level by retaining earnings and by obtaining funds in the capital markets. They then provide funds to their different divisions for investment in capital projects. The divisions may vary in risk, and the projects within the divisions may also vary in risk. Therefore, it is conceptually correct to use different risk-adjusted costs of capital for different capital budgeting projects.

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