Concept explainers
WACC True or false? Use of the WACC formula assumes
- a. A project supports a fixed amount of debt over the project’s economic life.
- b. The ratio of the debt supported by a project to project value is constant over the project’s economic life.
- c. The firm rebalances debt each period, keeping the debt-to-value ratio constant.
a)
To discuss: Whether the given statement is true or false.
Explanation of Solution
Given statement:
Project supports a fixed amount of debt over the economic life of a project.
Reason:
It is not true because only the ratio of debt is constant over the economic life of a project and the amount of debt is need not to fixed.
Hence, the given statement is false.
b)
To discuss: Whether the given statement is true or false.
Explanation of Solution
Given statement:
The ratio of debt supported by project to project value is fixed over the economic life of a project.
Reason:
It is true that the ratio of debt supported by project to project value is fixed over the economic life of a project.
Hence, the given statement is true.
c)
To discuss: Whether the given statement is true or false.
Explanation of Solution
Given statement:
The firm will keep the debt to value ratio constant and rebalances its debt each period.
Reasons:
It is true that the firm will keep the debt to value ratio constant and rebalances its debt each period.
Hence, the given statement is true.
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Chapter 19 Solutions
PRIN.OF CORPORATE FINANCE
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