Question10

As can be illustrated by SML graph, what is the disadvantage of using only the WACC as the sole discount rate for capital budgeting purpose in a company?

Select one:

a.The weights are based on market values of debt and equity.

b.The company tends to incorrectly accept risky projects and incorrectlyreject less risky projects.

c.There is no advantage since the projects being evaluated using the WACC are typically equal in risk to the firm's existing assets.

d.The company will have difficulties reaching its target capital structure.

e.Such a practice relies too much on the constant growth model to estimate the cost of equity.