When we use the WACC to assess a project, we assume that the ________ ratio does not change.
A) reward to systematic risk
B) risk to reward
C) debt to equity
D) volatility to systematic risk

Question

Quizplus · Accepted Answer

The WACC (weighted average cost of capital) equation incorporates the proportion of debt to equity financing in a company's capital structure. Therefore, when using the WACC to evaluate a project, we assume that the debt-to-equity ratio remains constant. Changes in this ratio would result in different financing costs, and thus a different WACC, potentially affecting the project's feasibility. The other choices listed (A, B, and D) are not directly included in the WACC equation and therefore do not affect its assumption.

When We Use the WACC to Assess a Project, We