Discounting free cash flows at the WACC assumes that debt is rebalanced every period to maintain a constant ratio of debt to market value of the firm.

Question

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Discounting free cash flows at the WACC assumes that the debt level is maintained at a constant ratio to the market value of the firm. This means that if the firm takes on more debt in a period, it will rebalance the debt to keep the same ratio. Therefore, the WACC remains constant over the forecasted period.

Discounting Free Cash Flows at the WACC Assumes That Debt