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#cfa-level-1 #corporate-finance #reading-36-cost-of-capital
If the systematic risk of the project is above or below average relative to the company’s current portfolio of projects, an upward or downward adjustment, respectively, is made to the company’s WACC. Companies may take an ad hoc or a systematic approach to making such adjustments.
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2.3. Applying the Cost of Capital to Capital Budgeting and Security Valuation
for the company overall. The cost of capital in these applications should reflect the riskiness of the future cash flows of the project, product, or division. For an average-risk project, the opportunity cost of capital is the company’s WACC. <span>If the systematic risk of the project is above or below average relative to the company’s current portfolio of projects, an upward or downward adjustment, respectively, is made to the company’s WACC. Companies may take an ad hoc or a systematic approach to making such adjustments. The discussion of a systematic approach is a somewhat advanced topic that we defer to Section 4.1. Figure 1. Optimal Investment Decision


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