Which of the following statements is FALSE?
A)The WACC can be used throughout the firm as the company wide cost of capital for new investments that are of comparable risk to the rest of the firm and that will not alter the firm's debt-equity ratio.
B)A disadvantage of the WACC method is that you need to know how the firm's leverage policy is implemented to make the capital budgeting decision.
C)The intuition for the WACC method is that the firm's weighted average cost of capital represents the average return the firm must pay to its investors (both debt and equity holders)on an after-tax basis.
D)To be profitable,a project should generate an expected return of at least the firm's weighted average cost of capital.

Question

Quizplus · Accepted Answer

A disadvantage of the WACC method is that you do not need to know how the firm's leverage policy is implemented to make the capital budgeting decision. The WACC assumes that the firm maintains a constant debt-equity ratio, but this is not always the case in reality. Changes in leverage policy can affect the cost of capital and therefore the decision to invest or not in a particular project.

Which of the Following Statements Is FALSE