Which of the following is true about the WACC?
A) The WACC is the appropriate discount rate for all new projects of the ﬁrm.
B) The optimal capital structure is the one that maximizes the WACC.
C) The value of the ﬁrm will be maximized when the WACC is minimized.
D) The WACC is virtually impossible to calculate for a ﬁrm with multiple divisions.
E) Since discount rates and ﬁrm value move in the same direction, minimizing the WACC will minimize the value of the ﬁrm.

Question

Quizplus · Accepted Answer

The WACC represents the cost of capital for the entire company, including debt and equity financing. Therefore, minimizing the WACC will lead to a lower cost of capital and a higher value of the firm. The optimal capital structure may not necessarily be the one that maximizes the WACC, and it is possible to calculate the WACC for a firm with multiple divisions with appropriate adjustments. A is incorrect because the WACC may not be appropriate for all new projects, especially those that have different risk profiles. E is also incorrect because minimizing the WACC will lead to a higher value of the firm, not a lower one.

Which of the Following Is True About the WACC