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Discuss uses of the estimated average cost of capital. Are there any considerations we should take...

Discuss uses of the estimated average cost of capital. Are there any considerations we should take into account?

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Answer #1

Uses of estimated average cost of capital are:

  1. It is used in financial modeling as the discount rate to calculate the net present value of a business.
  2. It is used to evaluate investment opportunities, as it is considered to represent the firm’s opportunity cost.
  3. Also, a company will commonly use its WACC as a hurdle rate for evaluating mergers and acquisitions.

Considerations:

  1. As a general practice, if an investment opportunity has a lower Internal Rate of Return (IRR) than its WACC, it should buy back its own shares or pay out a dividend instead of investing in the project.

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