Which of the following statements is FALSE?
A) If we can identify a comparison firm whose assets have the same risk as the project being evaluated, and if the comparison firm is levered, then we can use its equity cost of capital as the cost of capital for the project.
B) We can calculate the cost of capital of the firm's assets by computing the weighted average of the firm's equity and debt cost of capital, which we refer to as the firm's weighted average cost of capital (WACC).
C) The portfolio of a firm's equity and debt replicates the returns we would earn if the firm were unlevered.
D) When evaluating any potential investment project, we must use a discount rate that is appropriate given the risk of the project's free cash flow.
A
Explanation: A) If we can identify a comparison firm whose assets have the same risk as the project being evaluated, and if the comparison firm is levered, then we can use its unlevered equity cost of capital as the cost of capital for the project.
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