Question

A firm's WACC can be correctly used to discount the expected cash flows of a new project when that project will: Multiple Choice be financed solely with new debt and internal equity. have the same level of risk as the firm's current operations. be managed by the firm's current managers. be financed solely with internal equity. be financed based on the firm's current debt-equity ratio.

Answer 1

Answer:

...when that project will have the same level of risk as the firm's current operations

Explanation:

Weighted average cost of capital (WACC) is the company's cost of capital based on its proportion of equity and debt used in its capital structure. It can be used as the discount rate for calculating the present value of future expected cashflows of a project if the project is determined to be of similar risk to the company's operations; meaning that the estimated beta of the project is the same as the beta of the firm.