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Discuss why WACC may not be the best to use as a discounting factor in investment...

Discuss why WACC may not be the best to use as a discounting factor in investment appraisals.

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Answer #1

WACC may not be the best to use as a discounting factor because of following reason
1. It uses market value of equity and debt which is not always constant and keeps on fluctuating and hence WACC will not be constant.
2. Target Debt to equity to structure may keep on changing based on cost of debt and tax rate so calculating WACC for each year is difficult and hence it is difficult.
3. Cost of Equity is usually based on historical data and future values might be different and hence valuation might be distorted.

Please Discuss in case of Doubt

Best of Luck. God Bless
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