Question

True or False: The weighted average cost of capital can use the CAPM within the calculation of the cost of capital.

Answer 1

The correct answer is True

Note:

The CAPM can be used to compute the cost of equity which is used in the computation of the cost of capital. Hence, the weighted average cost of capital can use the CAPM within the calculation of the cost of capital.

CAPM uses the following formula to compute the Cost of equity :

Cost of equity = risk free rate + (Expected return on market - risk free rate)* beta

Further WACC = (Cost of Debt * Weight of Debt) + (Cost of Equity * Weight of Equity)+ (Cost of Preferred Stock * Weight of Preferred Stock )