medium · Principles of Finance
How does using market value weights for WACC reflect the 'Capital Rationing' environment of a firm?
- Using market weights increases the NPV of all projects, helping the firm accept more investments.
- Market weights ensure the WACC reflects the actual cost of raising the next dollar of capital, which is the relevant hurdle rate for rationed funds.
- Capital rationing only occurs when book values exceed market values.
- It doesn't; capital rationing is purely an internal budgeting issue unrelated to external market prices.
Sign up free to see the explanation and track your rank →
More Principles of Finance practice
- Which loan has the higher effective annual rate (EAR)?
- Using the Capital Asset Pricing Model (CAPM), calculate the cost of equity for a firm with
- What is its current market price?
- What is the Multiple of Invested Capital (MOIC) for the equity investors?
- What is its Modified Duration?
- What is the Cash Flow from Operations (CFO)?
- What is the net profit per share for the investor?
- What is its Degree of Financial Leverage (DFL)?