Series 79 practice questionmediumValuation Methods
Which statement about WACC in a DCF is correct?
- AWACC should equal the company tax rate
- BWACC excludes the cost of equity
- CWACC is the blended required return demanded by all providers of capital, weighted by target capital structure✓ Correct answer
- DWACC is used only for equity value and not enterprise value
Explanation
Why C — WACC is the blended required return demanded by all providers of capital, weighted by target capital structure
WACC is the blended required return demanded by all providers of capital, weighted by target capital structure Weighted average cost of capital reflects the opportunity cost for debt and equity investors together. Because an unlevered DCF values the whole firm, WACC is the appropriate discount rate for unlevered free cash flow.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 477+ Series 79 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Related Collection, Analysis & Evaluation of Data questions
- A banker is selecting comparable companies. Which factor is most important to keep constant besides industry, size, and…
- A company has 70 million basic shares at $30 per share, $170 million of debt, and $35 million of cash. Ignoring…
- In a sum-of-the-parts valuation, why might an industrial conglomerate be worth more in pieces than as a whole?
- Which valuation method is least affected by temporary differences in capital structure among peer companies?