The use of WACC as the discount rate when evaluating a project is acceptable when the:...
The use of WACC as the discount rate when evaluating a project is acceptable when the:
Select one:
a. firm is well diversified and the unsystematic risk is negligible
b. the project has the same debt capacity as the overall firm
c. systematic risk of the project is equal to the systematic risk of the firm
d. all of the above
e. b and c only
Homework Answers
Ans c. systematic risk of the project is equal to the systematic risk of the firm
The use of WACC as the discount rate when evaluating a project is acceptable when the systematic risk of the project is equal to the systematic risk of the firm.
WACC example:
| Investment | Tax Cost | Average Cost | ||
| Debt | 6,00,00,000 | 8% | 48,00,000 | |
| Common Stock | 14,60,00,000 | 12.00% | 1,75,20,000 | |
| 20,60,00,000 | Total Cost | 2,23,20,000 | ||
| WACC = | 22320000 / 206000000 * 100 | |||
| 10.83% | ||||
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