Suppose a firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all these projects that appear to have positive NPVs. Can you explain why such a firm would tend to become riskier over time?
Answer Excerpt
Suppose a firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all these projects that appear to have positive NPVs. Can you explain why such a firm would tend to become riskier […]