The WACC is used to _______ the expected cash flows when the firm has _______.
A) discount; debt and equity in the capital structure
B) discount; short term financing on the balance sheet
C) increase; debt and equity in the capital structure
D) decrease; short term financing on the balance sheet
E) None of these.

Question

Quizplus · Accepted Answer

The WACC (Weighted Average Cost of Capital) is used to discount the expected cash flows of a firm based on the proportion of debt and equity in its capital structure. The cost of debt and equity is weighted by their proportion in the capital structure to determine the overall cost of capital. This cost of capital is then used to discount the expected cash flows of the firm. Therefore, option A is the correct choice as it correctly identifies the purpose of the WACC.

The WACC Is Used to _______ the Expected Cash Flows