In Order to Use the WACC to Evaluate a Future

question 38

Multiple Choice

In order to use the WACC to evaluate a future project's flows, which of the following must hold?

• A) The project will be financed with the same proportion of debt and equity as the company.
• B) The systematic risk of the project is the same as the overall systematic risk of the company.
• C) The project must be viable.
• D) a and b above.

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Definitions:

Capital Market Line

A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio.

Forecasted Return

The predicted financial return of an investment over a specific period, often based on historical data, current trends, and professional analysis.

Required Return

The minimum return that an investor expects to achieve on an investment to consider it a worthwhile risk.

Standard Deviation

A measure of the dispersion or variability in a set of values, often used to gauge the risk associated with a particular investment or portfolio.