At any one time, should the same WACC be usedto evaluate each of a company’s capital budgetingprojects? If not, how should the WACC be adjusted for the different projects?
At any one time, should the same WACC be used
to evaluate each of a company’s capital budgeting
projects? If not, how should the WACC be adjusted for the different projects?
Introduction:
WACC reflects the weighted average capital costs. It is the measurement of weighted costs for all fund sources (debt, equity, and preferred shares). It is varies depending upon various organization’s nature, priorities and risk-return profile.
Answer:
The cost of capital differs for each and every project, and it depends on the risk of the projects. In other words, if the risk associated with the project increases the WACC will increase and vice versa, WACC differs from one project to another.
Several companies employ the capital asset pricing model (CAPM) to independently assess the capital costs for the each company. There are chances that each division may have specific capital structure that pertains to the particular division and impacts the capital costs of that division.
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