An increase in the firm's WACC will decrease project's NPVs, which could change the accept/reject decision for any potential project. However, such a change would have no impact on projects' IRRs. Therefore, the accept/reject decision under the IRR method is independent of the cost of capital. This statement is FALSE.
What is Weighted average cost of capital (WACC)?
The weighted average cost of capital (WACC), which includes common stock, preferred stock, bonds, and other types of debt, is the average after-tax cost of capital for a company. WACC is the typical interest rate a business expects to pay to finance its assets.
Because it expresses the return that both bondholders and shareholders require in order to provide the company with capital in a single number, the weighted average cost of capital is a popular method for calculating the required rate of return. Because investors will want higher returns, a company's WACC is likely to be higher if its stock is very volatile or if its debt is regarded as risky. Additionally, WACC is employed as the discount rate for future discounted cash flow analysis.
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