Why Is an Accurate WACC So Important When Evaluating a New

question 40

Multiple Choice

Why is an accurate WACC so important when evaluating a new project? Assume a negative cash outflow at Time 0 and positive project cash flows thereafter.

• A)The coupon rate on new bonds issued to fund the project will be set equal to WACC.
• B)The project's WACC will replace the firm's WACC as the discount rate for all future projects.
• C)The project's accept/reject decision will be based on the NPV calculated using that WACC.
• D)The return to shareholders will be limited by the WACC.
• E)The firm can only maintain or increase its current value if the project WACC exceeds the project's internal rate of return.

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Definitions:

Net Operating Income

A financial metric that denotes a company’s income after subtracting operating expenses but before interest and taxes.

Total Common Stock

The aggregate value or amount of all shares of common stock issued by a company.

Net Income Before Taxes

A financial measure showing a company's profitability after accounting for all expenses except taxes.

Stockholders' Equity

The ownership interest of shareholders in a company, represented by the company's assets minus its liabilities.