This part of question 3 asked for a discussion of the circumstances under which WACC could be used as the discount rate in investment appraisal, together with a brief indication of alternative approaches that could be used where WACC was not appropriate.

Good answers identified and discussed the link between business risk, financial risk and WACC, along the lines covered by the suggested answer. Essentially, WACC can be used as the discount rate in investment appraisal if business risk and financial risk do not change. Some answers ignored the requirement to indicate briefly alternative approaches that could be adopted and discussed at length the use of the capital asset pricing model in investment appraisal.