Series 79 practice questioneasyDCF Analysis
Which of the following best describes the discount rate applied to projected unlevered free cash flows in a DCF analysis?
- AAfter-tax cost of debt
- BCost of equity only
- CPre-tax cost of debt
- DWeighted average cost of capital (WACC)✓ Correct answer
Explanation
Why D — Weighted average cost of capital (WACC)
WACC correctly weights the costs of both debt and equity, reflecting the capital structure used to finance the firm's operations. Using only the cost of debt or equity would ignore the blended nature of the firm's funding and misstate the value.
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