Question

The weights used to compute the weighted-average required rate of return (WACC) should be obtained using:

1. the book value of a similar risk company
2. the market value of debt and equity
3. the book values of debt and equity
4. the CAPM

If the risk of a firm is identical to the risk of the project, the required rate of return for the firm may be applied to the project. Where the risk of the firm and project differ, a solution is to use:

1. the return for the market
2. the WACC of the firm
3. the return for the industry identical to that of the project
4. none of the above

Answer 1

WACC is the Weighted average of required returns from different sources

The weights used are:

b. · the market value of debt and equity

Where the risk of the firm and project differ, a solution is to use:

c. · the return for the industry identical to that of the project

Return is dependent upon the risk taken. Hence, when the risk of project is different from the risk level of the firm, the return of identical industry should be used