State whether the following statements are true or false. a. If a company uses its company cost of capital to value all projects, it will overestimate the value of high-risk projects. True False b. It is okay to use the company cost of capital to value every project as long as the high risks of some projects are offset by the low risks of others. True False c. A company can reduce the discount rate for a project by financing it with debt. True False

 a. True. If a company uses its overall company cost of capital to value all projects, it will overestimate the value of high-risk projects. This is because the company cost of capital generally reflects the risk of the average project undertaken by the company, and if a project is riskier than average, using the company cost of capital will not properly account for the increased risk. High-risk projects require a higher rate of return to compensate for the additional risk, and using the company's average cost of capital would imply a lower required return, hence overvaluing these high-risk projects.

b. False. It is not advisable to use the company cost of capital to value every project based on the assumption that high-risk projects will be offset by low-risk projects. Each project should be evaluated independently based on its specific risk profile. Using an aggregate cost of capital ignores the individual risk characteristics of each project, which can lead to poor investment decisions. Risks are not necessarily perfectly offset; some projects could systematically be riskier or less risky, and their values would not be accurately assessed under a blanket cost of capital assumption.

c. True. In general, a company can reduce the discount rate for a project by financing it with debt to some extent, because debt financing can be cheaper than equity financing. This is due to tax advantages associated with debt (tax-deductible interest payments), which can lower the effective cost. However, this only works up to a certain point. Increasing debt increases the financial risk of the company; if a company becomes overly leveraged, the cost of both debt and equity can rise because lenders and investors will require a higher return to compensate for the increased risk.