Which of the following statements is FALSE? A) The firm\'s weighted average cost

Question

Which of the following statements is FALSE?

A) The firm's weighted average cost of capital, denoted rwacc, is the cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt.

B) Intuitively, the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model the firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model.

C) We interpret rwacc as the expected return the firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together.

D) When using the discounted free cash flow model we should use the firm's equity cost of capital.

Explanation / Answer

Statement-D is False

When using Free Cash flow model, we should use WACC> However, when evaluating the Free Cash flow to Equity, we use Equity cost of capital

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