Best investment opportunity
All the companies are expected to pay, on average, 6% WACC to all its security holders to finance their assets. However, consideration of WACC is not an appropriate method for determining a valid investment opportunity when considering various investment options. WhiThis is because; WACC mixes up the value of the project with the taxation fee hence turning unattractive projects into acceptable ones. Therefore, WACC hinders the valuation of projects based on their own merits. Thus, calculations indicating that the three companies have to pay, on average, 6% WACC signifies that the three companies are subjected to similar financial markets.
The other criterion for evaluating the best investment opportunity is by examining the price to earnings ratio (P/E). This ratio transforms the company’s earnings into a measure that can be easily compared with other firms in the same sector of the economy. The ratio informs how much the investors will be willing to pay for a dollar earning in that particular company. Therefore, the higher the ratio, the more investors will be willing to spend. In this case, investors are willing to spend on company A since it has the highest P/E. Nevertheless, there may also exist a notion that company A’s stock has been overpriced and as such, investors may shy away. Other aspects such as sustainable growth and dividend yield will also affect the decision of investors on the company to invest in.
Even though companies A and B have higher sustainable growth than company C, company C yields higher dividends than companies A and B. Therefore, investors are more likely to settle for company C as the best investment opportunity.