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 value of the firm is maximized when the Weighted Average Cost of Capital (WACC) is minimized because the WACC represents the average rate of return required by all of the company's security holders. Minimizing the WACC reduces the firm's cost of capital, thereby increasing the present value of its future cash flows and maximizing the firm's value.

Which of the Following Is True About the WACC