A company's weighted average cost of capital: Group of answer choices remains constant when the debt-equity ratio changes. is equivalent to the aftertax cost of the outstanding liabilities. is unaffected by changes in corporate tax rates. should be used as the required return when analyzing some new projects. is the return investors require on the firm's stock.

Question

Nathen Duffy

Business

31 December, 12:41

A company's weighted average cost of capital: Group of answer choices remains constant when the debt-equity ratio changes. is equivalent to the aftertax cost of the outstanding liabilities. is unaffected by changes in corporate tax rates. should be used as the required return when analyzing some new projects. is the return investors require on the firm's stock.

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Serena Rogers · Answer 1

is the return investors require on the firm's stock.

Explanation:

The purpose of WACC is to determine the cost of each part of the company's capital structure based on the proportion of equity, debt, and preferred stock it has. Each component has a cost to the company. The company pays a fixed rate of interest on its debt and a fixed yield on its preferred stock. Though a firm does not pay a fixed rate of return on common equity, it does often pay dividends in the form of cash to equity holders.

The weighted average cost of capital is an integral part of a DCF valuation model and, thus, it is an important concept to understand for finance professionals, especially for investment banking and corporate development roles.