Question

In order to use a firm's WACC to evaluate its future project's flows, which of the following must hold?

A) The project will be financed with the same proportion of debt and equity as the firm.
B) The systematic risk of the project is the same as the overall systematic risk of the firm.
C) The project should have conventional cash flows.
D) Both A and B above

Answer 1

In order to use a firm's WACC to evaluate its future project's flows, both the project being financed with the same proportion of debt and equity as the firm, and the systematic risk of the project being the same as the overall systematic risk of the firm, must hold.

Step-by-step explanation:

In order to use a firm's WACC (Weighted Average Cost of Capital) to evaluate its future project's flows, both A) The project will be financed with the same proportion of debt and equity as the firm, and B) The systematic risk of the project is the same as the overall systematic risk of the firm, must hold.

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