WACC Is the Most Appropriate Discount Rate to Use When

question 22

Multiple Choice

WACC is the most appropriate discount rate to use when applying a ______ valuation model.

• A) FCFF
• B) FCFE
• C) DDM
• D) FCFF or DDM, depending on the debt level of the firm,
• E) P/E

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Definitions:

Profit-maximizing Quantity

The quantity of a product that results in the highest possible profit for the producer, determined by the point where marginal cost equals marginal revenue.

Production Function

A mathematical relation that describes the maximum output of a good derived from different combinations of factors of production.

Cost Per Unit

The total cost incurred in producing, manufacturing, or acquiring a single unit of a specific good or service.

Profit Maximization

The approach a business takes to determine the pricing and output that lead to the utmost profit.