If the debt-to-equity ratio is expected to fluctuate substantially during the forecast period,applying conventional capital budgeting techniques that discount future cash flows with a constant weighted average cost of capital (CC)is appropriate.

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Quizplus · Accepted Answer

If the debt-to-equity ratio is expected to fluctuate substantially, the appropriate approach would be to use adjusted discount rates that reflect the changing risk profile of the firm. Using a constant weighted average cost of capital (WACC) would not capture the changing risk and therefore would not provide an accurate valuation.

If the Debt-To-Equity Ratio Is Expected to Fluctuate Substantially During