If the WACC is used in valuing a leveraged buyout, the:

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Quizplus · Accepted Answer

The WACC must be recalculated as the debt is repaid and the cost of capital changes because the leverage ratio changes over time as debt is repaid. The cost of equity and debt also change over time, so the WACC must be recalculated to reflect these changes. Flotation costs are typically already included in the calculation of the WACC, so they do not need to be added separately. Tax shields of debt are still available in a leveraged buyout, so option D is incorrect. Option A is incorrect because the target debt ratio may change over time, affecting the WACC.

If the WACC Is Used in Valuing a Leveraged Buyout