What is the Weighted Average Cost of Capital (WACC)?
AThe cost of issuing common equity only
BThe required average rate of return a company must earn on its existing asset base to satisfy all capital providers
CThe coupon rate paid on long-term corporate bonds
DThe discount rate applied only to high-risk risk-free Treasury bills
Explanation
Core Concept: WACC calculates a firm’s blended cost of capital across all sources (debt, preferred stock, common equity) proportional to their target market value weights. Context/Distractors: WACC incorporates both debt and equity sources, adjusted for the corporate tax shield on debt interest. Exam Tip/Key Fact: Formula: WACC = (E/V * Ke) + (D/V * Kd * (1 – T)).
Exam Relevance
- Topic: Corporate Finance
- Subtopic: Cost of Capital
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