Asked by Neupane Saroj on Jul 13, 2024
Verified
A firm should always use its own WACC to evaluate projects regardless of their level of risk.
WACC
Weighted Average Cost of Capital, a calculation that reflects the cost of a company to finance its assets through a mix of equity and debt.
Level of Risk
The level of risk and possible monetary loss associated with making an investment choice.
- Recognize the importance of using an appropriate discount rate, specifically the weighted average cost of capital (WACC), in evaluating investment projects, including adjustments for project risk.
Verified Answer
BA
Bhavesh AroraJul 15, 2024
Final Answer :
False
Explanation :
A firm's WACC represents the required rate of return for a company's overall operations, assuming a certain level of risk. However, the risk profile of each individual project may differ from the company's overall risk profile, and therefore may require a different required rate of return. Thus, a firm should use different discount rates for each individual project to evaluate its profitability.
Learning Objectives
- Recognize the importance of using an appropriate discount rate, specifically the weighted average cost of capital (WACC), in evaluating investment projects, including adjustments for project risk.