Identify and explain three conditions which have to be satisfied before the use of weighted average cost of capital can be justified?

1. Stable capital structure: Before using the weighted average cost of capital (WACC), a company's capital structure should be relatively stable. Fluctuations in the proportion of debt and equity in the capital structure can impact the WACC calculation, making it less reliable. Therefore, a stable capital structure is necessary to ensure the accuracy of the WACC calculation.

2. Consistent risk profile: The WACC is based on the assumption that the risk profile of the company remains consistent over time. If the risk profile of the company changes significantly, the WACC calculation may no longer be valid. Therefore, before using WACC, it is important to ensure that the company's risk profile is relatively stable and consistent.

3. Accurate cost of capital estimates: The WACC calculation relies on accurate estimates of the cost of debt and cost of equity. If these estimates are not reliable, the WACC calculation will be flawed. Therefore, before using WACC, it is essential to ensure that the cost of debt and cost of equity are accurately estimated to obtain a reliable WACC figure.