Question

What’s the impact of errors if estimated Weighted Average Cost of Capital 10%, and actual was 12%, and estimated was10%, and actual was 8%,

Please answer my question as soon as possible, this is very important

Answer 1

estimated Weighted Average Cost of Capital 10%, and actual was 12%

This will overstate the present value of future cash flows. Th project may appear profitable due to a lower estimated WACC of 10%. This will lead to an investment in a project that should have beed rejected because of the actual WACC being 12%. this will destroy the value of the company and lead to erosion of shareholders wealth.

estimated Weighted Average Cost of Capital 10%, and actual was 8%

This will unerstate the present value of future cash flows. The project may appear as a bad investment which wiil lead to rejection of the project. However, in reality the project can a profitable one due to a lower actual WACC of 8%. This rejection will be lost oppurtunity for creating wealth for the shareholders.

answered by: anonymous