Chapter 10, Problem 4Q

Summary Introduction

To identify: The WACC should be used or not to evaluate all its potential project even if they vary in risk and if WACC is not used the reasonable costs of capital for average, high, and low-risk projects.

Introduction:

Weighted Average Cost of Capital:

It is the weighted average cost of capital of all the sources through which the firm finances its capital. It is  the rate that a company will pay to all for raising finance. It can be termed as firm’s cost of capital. The company raises money through various sources such as common stock, preference share debt the WACC is calculated taking the relative weight of each item of capital structure.