A firm's weighted average cost of capital is a function of (1) the individual costs of capital, (2) the capital structure mix, and (3) the level of financing necessary to make the investment. True False

Question

Ezequiel

Business

5 May, 18:10

A firm's weighted average cost of capital is a function of (1) the individual costs of capital, (2) the capital structure mix, and (3) the level of financing necessary to make the investment. True False

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Dean Howell · Answer 1

Answer: False

A firm's weighted average cost of capital is a function of the capital structure mix

Explanation:

The capital structure of a firm is the proportion of debt and equity that result in the lowest weighted average cost of capital (WACC).

A firm's total cost of capital is a weighted average of the cost of equity and the cost of debt, known as the weighted average cost of capital (WACC).

The formula is equal to:

WACC = (E/V x Re) + ((D/V x Rd) x (1 - T))

Where:

E = market value of the firm's equity (market cap)

D = market value of the firm's debt

V = total value of capital (equity plus debt)

E/V = percentage of capital that is equity

D/V = percentage of capital that is debt

Re = cost of equity (required rate of return)

Rd = cost of debt (yield to maturity on existing debt)

T = tax rate