Identify and briefly explain three conditions which have to be satisfied before the use of the weighted average cost of capital (WACC) can be justified.

Required conditions for using the WACC
• The WACC assumes the project is a marginal, scalar addition to the company‟s existing activities, with no overspill or synergistic impact likely to disturb the current valuation relationships.
• It assumes that project financing involves no deviation from the current capital structure (otherwise the MCC should be used.). The financing mix is similar to existing capital structure.
• Using the WACC implies that any new project has the same systematic or operating risk as the company‟s existing operations. This is possibly a reasonable assumptions for minor projects in existing areas and perhaps replacements but hardly so for major new product developments.