Weighted Average Cost of Capital (WACC): The weighted average cost of capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm. It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else. Cost of capital: Cost of capital can be defined as the opportunity cost used to make a specific investment. It refers to the rate of return that may be earned by investing the same amount in a different investment involving equal amount of risk. Thus, it is the rate of return needed to convince an investor to make an investment. To ascertain: The reason why market-value weights are used in the calculation of Weighted Average Cost of Capital.

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Chapter 13, Problem 2CC

Summary Introduction

Weighted Average Cost of Capital (WACC):

The weighted average cost of capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm. It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else.

Cost of capital:

Cost of capital can be defined as the opportunity cost used to make a specific investment. It refers to the rate of return that may be earned by investing the same amount in a different investment involving equal amount of risk. Thus, it is the rate of return needed to convince an investor to make an investment.

To ascertain: The reason why market-value weights are used in the calculation of Weighted Average Cost of Capital.

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