Asked by Starr Holstick on Jul 04, 2024
Verified
If a firm uses its WACC as the discount rate for all of the projects it undertakes, then the firm will tend to become riskier over time.
WACC
The weighted average cost of capital, a calculation that reflects the average rate of return a company is expected to pay its security holders to finance its assets.
Riskier
Describing an option or investment with a higher level of uncertainty or potential for loss.
- Appreciate the necessity of assessing project risks beyond the application of the Weighted Average Cost of Capital (WACC) as a decisive rate.
- Appreciate the possible errors in deploying the Weighted Average Cost of Capital (WACC) universally for the evaluation of all projects.
Verified Answer
AZ
ashley zeppieriJul 08, 2024
Final Answer :
True
Explanation :
Using the Weighted Average Cost of Capital (WACC) as a universal discount rate ignores the varying risk profiles of different projects. Projects with higher risk than the firm's average will appear more attractive, leading to a riskier portfolio over time.
Learning Objectives
- Appreciate the necessity of assessing project risks beyond the application of the Weighted Average Cost of Capital (WACC) as a decisive rate.
- Appreciate the possible errors in deploying the Weighted Average Cost of Capital (WACC) universally for the evaluation of all projects.