If an analyst wants to value a potential investment in the net operating assets of a division of another firm the analyst should discount the projected free cash flows at the
A) Cost of debt capital
B) cost of equity capital
C) weighted average cost of capital
D) risk free rate

Question

Quizplus · Accepted Answer

The best choice to value the potential investment in the net operating assets of a division of another firm is to discount the projected free cash flows at the weighted average cost of capital (WACC), which is the average cost the company is paying for its capital from both debt and equity sources. This is because the WACC represents the cost of funds that the company is using to fund its operations, and it takes into account the risk associated with both debt and equity financing. Therefore, using the WACC to discount the projected free cash flows is the most appropriate and comprehensive way to arrive at a fair valuation of the net operating assets.

If an Analyst Wants to Value a Potential Investment in the Net