Series 79 practice questioneasyDiscounted Cash Flow (DCF) - WACC
An analyst is preparing a DCF valuation for a company with both debt and equity. Which discount rate should typically be used to discount free cash flows to the firm (FCFF)?
- ACost of debt
- BCost of equity
- CWeighted average cost of capital (WACC)✓ Correct answer
- DDividend yield
Explanation
Why C — Weighted average cost of capital (WACC)
FCFF is discounted at WACC, which reflects the blended cost of both debt and equity. Cost of debt and cost of equity alone do not account for total firm capital structure, and dividend yield is irrelevant.
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