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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

How might a firm’s corporate WACC be affected by the size of its capital budget?

Summary Introduction

To discuss: The way in which a firm’s corporate weighted average cost of capital (WACC) is affected by the size of its capital budget.

Introduction:

The planning process that is utilized to find the long-term investments of the firm such as a new plant, machinery, replacement of machinery, and research and development worth’s the funding from the firm’s capital is termed as capital budgeting.

Explanation

The way in which a firm’s corporate WACC is affected by the size of its capital budget is as follows:

The profitable projects can be financed only in large matured firms who have good tracks records. However, it is not suitable for new firms, smaller firms, and firm with dubious track records.  These firms will face difficulties in raising capital even when the firm’s project indicates a positive NPV...

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