Question
Which of the following statements is false? When the market risk of the project is similar to the average market risk of the firm's investments,
Which of the following statements is false?
When the market risk of the project is similar to the average market risk of the firm's investments, then its cost of capital is equivalent to the cost of capital for a portfolio of all of the firm's securities; that is, the project's cost of capital is equal to the firms weighted average cost of capital (WACC).
All of the statements are corrects
A project's cost of capital depends on its risk.
The WACC incorporates the benefit of the interest tax shield by using the firm's before-tax cost of capital for debt.
Because the WACC incorporates the tax savings from debt, we can compute the levered value of an investment, which is its value including the benefit of interest tax shields given the firm's leverage policy, by discounting its future free cash flow using the WACC.
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