Final answer:
The true statement about the WACC valuation method is that a year-on-year increase in operating provisions decreases a firm's free cash flow, because those funds are earmarked for future expenses and thus unavailable as free cash flow.
Step-by-step explanation:
The correct statement about the weighted average cost of capital (WACC) valuation method is d. all else equal, a year-on-year increase in operating provisions decreases the free cash flow of a firm. This is because an increase in operating provisions, which are essentially liabilities anticipating future expenses, represents funds that are not available for free cash flow. Free cash flow is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets; thus, an increase in provisions suggests a higher future cash outflow, reducing the available free cash flow.
A disproportionate decrease in current assets relative to current liabilities does not necessarily increase free cash flow. Instead, it might indicate that the company is liquidating assets faster than it is paying off liabilities, which could be a sign of financial distress. Regarding the free cash flow considering the debt-equity mix, it's crucial to note that free cash flow does not include financing activities by definition—it is focused on operating and investment cash flows. Lastly, the small firm premium is added to the cost of equity not because small firms perform worse, but because they usually come with higher risk compared to larger, well-established firms.