A firm is considering financing a project with debt

Finance Dec 24, 2020

A firm is considering financing a project with debt. The firm should accept the project if the IRR of the project is greater than the firm's cost of equity. O the IRR of the project is greater than the firm's cost of debt. the IRR of the project is greater than the firm's WACC. The firm should not accept any project financed with debt.

Expert Solution

Answer: If the IRR of the project is greater than its WACC.

Explanation:

Though debt is used for the proposed project, the hurdle rate should be the WACC, as that represents the current overall cost of capital of the firm.

Further, if the firm has a target capital structure, the WACC should be based on the target capital structure.

If cost of debt is used, it would be lower and will not represent the risk of the cash flows attached to the project. It will make a rejectable project acceptable.

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