Which of the following is true regarding the WACC? a. The WACC is equal to the f

Question

Which of the following is true regarding the WACC?

a. The WACC is equal to the firm s embedded debt cost times (1 the tax rate).

b. The WACC can be estimated by taking the simple average of the cost of equity, cost of debt and cost of preferred stocks.

c. The WACC is the required return on any investments a firm makes that have a level of risk equal to that of present operations.

d. The WACC reflects the risk and target capital structure of the market as a whole.

e. None of the above

a. The WACC is equal to the firm s embedded debt cost times (1 the tax rate).

b. The WACC can be estimated by taking the simple average of the cost of equity, cost of debt and cost of preferred stocks.

c. The WACC is the required return on any investments a firm makes that have a level of risk equal to that of present operations.

d. The WACC reflects the risk and target capital structure of the market as a whole.

e. None of the above

Explanation / Answer

Option c is correct option
The WACC is the required return on any investments a firm makes that have a level of risk equal to that of present operations because WACC is calculated not on market scenario but on the risk of specific project.
Option a is incorrect because it includes both cost of equity and after tax debt.
Option b is incorrect because it is not simple average but weighed average cost of equity and debt.
Option d is incorrect because WACC represent target capital structure of project and not of the market as a whole.



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