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Question
Assertion :Weighted average cost of capital should be used as a hurdle rate for accepting or rejecting a capital budgeting proposal. Reason: It is because by financing in the proportions specified and accepting the project, yielding more than the weighted average required return, the firm is able to increase the market price of its stock.
Assertion :Weighted average cost of capital should be used as a hurdle rate for accepting or rejecting a capital budgeting proposal. Reason: It is because by financing in the proportions specified and accepting the project, yielding more than the weighted average required return, the firm is able to increase the market price of its stock.
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Solution
The correct option is A Both Assertion and Reason are correct and Reason is the correct explanation for Assertion
Cost of capital is a hurdle rate in capital budgeting. It is the rate of return that a firm must earn to maintain its share price. A project would be viable only if it generates a return greater than cost of capital.
Cost of capital is a hurdle rate in capital budgeting. It is the rate of return that a firm must earn to maintain its share price. A project would be viable only if it generates a return greater than cost of capital.
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