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    PracticeCPA®CPA BAR Practice ExamQuestion 37
    Easy1 markMultiple Choice
    Area 2: Financial Statement AnalysisFinancial AnalysisValuationDCF

    CPA · Question 37 · Area 2: Financial Statement Analysis

    In a Discounted Cash Flow (DCF) model, increasing the Weighted Average Cost of Capital (WACC) will have what effect on the estimated Enterprise Value?

    Answer options:

    A.

    Decrease the value.

    B.

    Increase the value.

    C.

    No effect.

    D.

    Depends on the growth rate.

    How to approach this question

    Math logic: PV = Cash Flow / Rate. If Rate (WACC) goes up, PV goes down.

    Full Answer

    A.Decrease the value.✓ Correct
    The WACC represents the discount rate. Discounting future cash flows at a higher rate reduces their present value.

    Common mistakes

    Confusing the discount rate with the growth rate.
    Question 36All questionsQuestion 38

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