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Question
Under normal circumstances, the weighted average cost of capital (WACC) is used as the firm's required rate of return because:
a. as long as the firm's investments earn returns greater than its WACC, the value of the firm will not decrease.
b. any returns less than the WACC will cover the fixed costs associated with the capital and provide excess returns to the firm's stockholders.
c. it is the average of all the interest rates on the firm's existing debt.
d. it is an indication of the returns the firm expects to earn in the future from investing in capital budgeting projects.
e. it represents the average return the firm currently earns on the funds it has invested in assets.
Answer
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Related questions
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c. Firms with relatively high debt ratios have higher expected returns when business is bad.
d. Firms with relatively high debt ratios have higher expected returns when business is good.
e. Firms with relatively low debt ratios have higher expected returns when business is poor.