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Which one of the following questions regarding WACC is false? 1. A firm's WACC reflects the...

Which one of the following questions regarding WACC is false?

1. A firm's WACC reflects the risk of an average project undertaken by the firm.

2. In the Subjective Approach to risk-adjusting WACC, a project that is riskier than average should have a discount rate lower than WACC.

3. WACC is used as a discount rate for a project with firm-average risk.

4. WACC can be viewed as a hurdle rate.

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Answer #1

Q)

Which one of the following questions regarding WACC is false?

1. A firm's WACC reflects the risk of an average project undertaken by the firm.

2. In the Subjective Approach to risk-adjusting WACC, a project that is riskier than average should have a discount rate lower than WACC.

3. WACC is used as a discount rate for a project with firm-average risk.

4. WACC can be viewed as a hurdle rate.

Ans : 4. WACC can be viewed as a hurdle rate.

WACC is not a Hurdle rate . An hurdle rate is different from WACC .A hurdle rate may be higher or lower than a company's WACC. That means, a company could set a target return that is lower than it's WACC and take on projects that actually detract from the value of the firm. Conversely, it could set a higher hurdle that forces it to reject projects above WACC that still add value.

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