How would you respond to someone who argues that if Megacorp is considering a project, in...

  

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How would you respond to someone who argues that if Megacorp is considering a project, in its usual line of business, which will be financed entirely using a new bond issue, the cost of debt is the appropriate hurdle rate for this project? Explain. This is incorrect as the project must eam a return at least as high as the overall weighted average cost of capital of the firm as its risk is similar to the overall risk of the firm. How it is eventually financed is not relevant to the capital budgeting decision. How would you respond to someone who argues that if Megacorp is considering a project, in its usual line of business, which will be financed entirely using a new bond issue, the cost of debt is the appropriate hurdle rate for this project? Explain. This is incorrect as the project must eam a return at least as high as the overall weighted average cost of capital of the firm as its risk is similar to the overall risk of the firm. How it is eventually financed is not relevant to the capital budgeting decision.

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The hurdle rate means minimum rate of return to be earned from a project Th... View the full answer