The opportunity cost of capital, used to calculate the base-case for adjusted present value analyses, can be thought of as
A)the promised yield rather than the expected yield of an investment.
B)the rate corresponding to an average debt level among firms in the industry.
C)the WACC of an all-equity financed version of the firm.
D)the return on the opportunities exploited by a firm's competitors.

Question

Quizplus · Accepted Answer

The opportunity cost of capital used in APV analysis is the weighted average cost of capital (WACC) for an all-equity financed version of the firm. This is because APV analysis involves adjusting for the tax benefits of interest payments, which essentially eliminates the effect of debt on the WACC. Therefore, the opportunity cost of capital is the cost of equity, which is the expected return demanded by investors for investing in the firm's equity.

The Opportunity Cost of Capital, Used to Calculate the Base-Case