One important consideration is that the future changes in interest rates could make expected future cash flows
disappear, especially if the risk is non-diversified.” The fact that the nondiversifiable risk has a wide range is also a key factor in the question.
Non-diversifiable risk essentially has two parts; operating risk and financial risk. The operating risk is based on the firm’s assets while the financial risk is primarily based on the firm’s capital structure (how the firm is financed).
In what ways do operating risk and financial risk impact the required return (cost of capital) of a potential project?
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