Question

A firm's WACC: A) Is the proper discount rate for every project the firm undertakes B)...

A firm's WACC:

A) Is the proper discount rate for every project the firm undertakes

B) Is used to value all of the firm's existing projects

C) Is a benchmark discount rate that is adjusted for the riskines of each project

D) Is an informational value only and should never be used as a discount rate

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

C) Is a benchmark discount rate that is adjusted for the riskines of each project

WACC is weighted average cost of capital for the firm in which each category of capital is proportionately weighted. This WACC also is a risk indicator. Higher WACC signals higher risk and vice-versa. This WACC is used as a discount rate as well, when assessing the firm's cashflows

This firm's WACC, however, cannot be directly used to assess the cashflows associated with projects that company wants to undertake. Every prject will have it own set of risk as well as a capital structure plan, and the firm's WACC should be adjusted to appropriately display the associated risk with the project. Higher risk project should have cashflows discounted by a WACC + Risk premium during assessment.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The weighted average cost of capital for a firm with debt is the: Multiple Choice discount...
The weighted average cost of capital for a firm with debt is the: Multiple Choice discount rate that the firm should apply to all of the projects it undertakes. rate of return a company must earn on its existing assets to maintain the current value of its stock. coupon rate the firm should expect to pay on its next bond issue. minimum discount rate the firm should require on any new project. rate of return debtholders should expect to earn...
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.
if the risk of an investment project has a beta of 1: a- projects initial cost...
if the risk of an investment project has a beta of 1: a- projects initial cost should be increased/ decreased to account for the increase/ decrease in risk. b- projects discount rate must not be adjusted based on the risks of the projects cash flows. c- projects discount rate must be adjusted based on the sources of project financing. d- average rate used for all prior projects should be used as the new projects discount rate. e- market rate of...
Midwest Water Works estimates that its WACC is 10.46%. The company is considering the following capital...
Midwest Water Works estimates that its WACC is 10.46%. The company is considering the following capital budgeting projects. Assume that each of these projects is just as risky as the firm's existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be accepted? Project Size Rate of Return A $1 million      12.0% -Select-AcceptDon't accept B 2 million 11.5 -Select-AcceptDon't accept C 2 million 11.2 -Select-AcceptDon't accept D 2 million...
5. Solving for the WACC The WACC is used as the discount rate to evaluate various...
5. Solving for the WACC The WACC is used as the discount rate to evaluate various capital budgeting projects. However, it is important to realize that the WACC is an appropriate discount rate only for a project of average risk. Analyze the cost of capital situations of the following company cases, and answer the specific questions that finance professionals need to address. Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 58% debt, 6% preferred...
WACC—Book weights???Ridge Tool has on its books the amounts and specific? (after-tax) costs shown in the...
WACC—Book weights???Ridge Tool has on its books the amounts and specific? (after-tax) costs shown in the following table for each source of? capital: (see chart all the way below) a. Calculate the? firm's weighted average cost of capital using book value weights. b.??Explain how the firm can use this cost in the investment? decision-making process. a.??The? firm's weighted average cost of? capital, ra, using book value weights is ?%?. ?(Round to two decimal? places.) b.??Explain how the firm can use...
What advantages can be cited for management calculating the firm's return on capital (ROC) using both...
What advantages can be cited for management calculating the firm's return on capital (ROC) using both the after-tax operating margin and the capital turnover ratio? I. To provide insight into variables responsible for generating ROC II. To better understand how effectively the firm's invested capital is being used III. To assist in determining the firm's expected growth rate Select one: A. I only B. II only C. I and II only D. I and III only E. II and III...
Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a risk-adjusted project cost...
Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a risk-adjusted project cost of capital of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects? a. Project C, which has above-average risk and an IRR = 11%. b. Without information about the projects' NPVs we cannot determine which project(s) should be...
Firm A and Firm B (not their real names) are competitors in the manufactured housing industry,...
Firm A and Firm B (not their real names) are competitors in the manufactured housing industry, so they often face the same investment opportunities. However, because Firm A is in better financial shape (and therefore less risky) than Firm B, its cost of financing is lower. Specifically, Firm A’s WACC is 11% while Firm B’s WACC is 15% Which of the following is/are true as a result of this? Group of answer choices You know, this is all very confusing....
Marble Construction estimates that its WACC is 8% if equity comes from retained earnings. However, if...
Marble Construction estimates that its WACC is 8% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 8.8%. The company believes that it will exhaust its retained earnings at $2,400,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects: Project Size IRR A $    650,000 13.9 %...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT