hard · Principles of Finance

How should this impact the project-specific hurdle rate compared to a similar project with low operating leverage?

1. Operating leverage only affects the cost of debt, not the cost of equity.
2. The hurdle rate should be lower because the fixed costs provide a predictable cash flow base.
3. There is no adjustment needed if the firm's overall operating leverage is the same.
4. The project-specific hurdle rate should be higher because high operating leverage increases the asset β.

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