WidgetBaker is considering making an acquisition of RiskyWidgets. Widgetbaker has a WACC of 12.5%, whereas RiskyWidgets has a WACC of 15.0%. The two firms are funded by the same proportions of debt and equity in their capital structure, which will not change as a result of the acquisition.
Which of the following best describes the appropriate discount trate to use to evaluate the acquisition of RiskyWidgets?

Question

WidgetBaker is considering making an acquisition of RiskyWidgets. Widgetbaker has a WACC of 12.5%, whereas RiskyWidgets has a WACC of 15.0%. The two firms are funded by the same proportions of debt and equity in their capital structure, which will not change as a result of the acquisition. 
 Which of the following best describes the appropriate discount trate to use to evaluate the acquisition of RiskyWidgets?

Accepted Answer

RiskyWidgets' WACC is the most appropriate discount rate to account for the risk of RiskyWidgets' cash flows

Answer

The risk-free rate will best account for the risk of RiskyWidgets' cash flows.

Answer

An average WACC from WidgetBaker and RiskyWidgets will best account for the risk of RiskyWidgets' cash flows.

Answer

WidgetBaker's WACC is the most appropriate discount rate to account for the risk of RiskyWidgets' cash flows

Crowdly

WidgetBaker is considering making an acquisition of RiskyWidgets. Widgetbaker ha...

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