Asked by Lisdrey Cires on Jun 28, 2024
Verified
Compare and contrast the pure play and the subjective approaches to WACC.
Pure Play
A company that focuses on a single type of product or service, without diversification into other areas.
Subjective Approaches
Methods based on personal opinions, interpretations, points of view, or judgments rather than on objective or external data.
WACC
Weighted Average Cost of Capital, a calculation that reflects the average rate that a company is expected to pay its security holders to finance its assets.
- Comprehend the definitions and differences between pure play and subjective approaches to calculating the Weighted Average Cost of Capital (WACC).
Verified Answer
FT
Filiana TanotoJul 01, 2024
Final Answer :
Both the pure play and the subjective approaches are designed to adjust WACC for the risk level of each individual project. The pure play finds a firm that specializes solely in the type of work that the project entails and utilizes information from that firm to compute an appropriate WACC. As long as your firm operates in a similar manner to the pure play firm, this should produce a reliable WACC. The subjective approach uses your own firm's WACC as the base value and then increases or decreases that rate to tentatively adjust to the risk level of the project.
Learning Objectives
- Comprehend the definitions and differences between pure play and subjective approaches to calculating the Weighted Average Cost of Capital (WACC).