When One Uses the Weighted Average Cost of Capital (WACC)to

question 73

Multiple Choice

When one uses the weighted average cost of capital (WACC) to value a levered firm,the interest tax shield is:

• A)not accounted for by the use of the WACC
• B)considered by deducting the interest payment from the cash flows
• C)automatically considered because the after-tax cost of debt is included within the WACC formula
• D)capitalized by the levered cost of equity

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Definitions:

Face Value

The nominal or dollar value of a security stated by the issuer, primarily relevant for bonds and the amount repaid at maturity.

Yield To Maturity

The total return anticipated on a bond if it is held until the date it matures, including both interest payments and capital gains.

Real Rate Of Return

The annual percentage profit earned on an investment, adjusted for changes in the price level due to inflation or other external effects.

Inflation Rate

The general rise in prices across goods and services, resulting in a decrease in the ability to purchase.