ExpertEasy1 markMultiple Choice
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?
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
A
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.
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