Abstract
The WACC is frequently used as a firm’s hurdle rate for capital investments. An investment earning more than the WACC is defined to be acceptable to the firm. To be used effectively, the costs of the capital have to be defined for the specific asset being evaluated. We cannot use with confidence the weighted average cost of capital to evaluate a non-average investment. Unfortunately, investments differ as to risk as well as the time at which cash flows are earned.
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References
Brealey, R.A. and S.C. Myers, Principles of Corporate Finance, Fifth Edition, McGraw-Hill, New York, 1996, pp. 533–535, 540, 541–544.
Miles, J.A. and J.R. Ezzell, “The Weighted Average Cost of Capital, Markets, and Project Life: A Clarification,” Journal of Financial and Quantitative Analysis, September, 1980, pp. 719–730.
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© 2003 Springer Science+Business Media Dordrecht
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Bierman, H. (2003). Capital Structure and Capital Budgeting Decisions. In: The Capital Structure Decision. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-1037-6_8
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DOI: https://doi.org/10.1007/978-1-4615-1037-6_8
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4613-5363-8
Online ISBN: 978-1-4615-1037-6
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