The most appropriate discount rate to use when applying the Operating Free Cash Flows model is the firm's
A) Required rate of return based on the capital asset pricing model (CAPM)
B) Required rate of return based on the dividend discount model (DDM)
C) Weighted average cost of capital (WACC)
D) Historical cost of debt and equity
E) All of the above are appropriate depending on the situation

Question

Quizplus · Accepted Answer

The appropriate discount rate to use when applying the Operating Free Cash Flows model is the weighted average cost of capital (WACC). This is because WACC takes into account the cost of both debt and equity financing, which represent the sources of capital used to fund the firm's operations. The WACC is the minimum return that the company needs to earn on its investments to satisfy the expectations of its investors while maintaining the level of risk that they are comfortable with. Other methods, such as CAPM and DDM, may be used in certain situations, but WACC is considered the most appropriate and widely used discount rate for the Operating Free Cash Flows model.

The Most Appropriate Discount Rate to Use When Applying the Operating