Question

what implications on capital budgeting there may be of an inappropriately estimated WACC. (include references)

Answer 1

In capital budgeting we need to discount the future cash flows expected from the project.

The discount rate used is the WACC of the company since it represents the opportunity cost of funds. Hence if the WACC is estimated higher than actual, it will reducet he cash flows and this meay lead to incorrect rejection of the project.

Conversely if the WACC is lower than actual, it will magnify the present values and this may lead to inaccurate acceptance oft he project.

(Kuger&Landier,2011,The WACC Fallacy: "The Real Effects of Using a Unique Discount Rate")