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Conceptual Overview: Explore the trade-off between risk and the cost of capital. The line represents WACC, the weighted average cost of capital as a function of risk. Three projects with the risk levels Risk (low). RiskA (average), and Risk (high are highlighted. The vertical axis shows the necessary rate of retum a fimm would need to go forward with a project given the level of WACC. Drag the line on the left side to change the y.intercept of the WACC line. Changes in the y-intercept often are caused by inflation or deflation Observe how changing the intercept influences the acceptance region and the rates of return needed by the three firms. Drag the line on the right side to change the slope of the WACC line. Changes in slope reflect risk A steeper slope means there is greater risk, while a flatter slope means there is less risk. Observe how changes in risk (the slope of the line) intoence the acceptance region and the rate of return required by the three projects Rate of Retur Full Book Acceptance Region 12.09 1009 BON 605 Rejection Region Rate of Return Acceptance Region 12.0% 10.0% 8.0% 6.0% Rejection Region RII RISKA Risk Risk 1. As the y-intercept changes, the relative differences in the required rate of return for the three risk levels: a. Remain the same b. Increase c. Decrease d. Cannot determine Select- 2. As the slope increases, the relative differences in the required rate of return for the three risk levels: a. Remain the same b. Increase c. Decrease d. Cannot determine Select