Question

A firm’s overall cost of capital is also known as:

a. capital budgeting

b. capital structure.

c. weighted average cost of capital.

d. none of the answers is correct.

e. capital asset pricing model

Answer 1

A business can be started with entirely debt or entirely equity financing. Debt financing is more tax – efficient than other one. So Many firms use both equity and debt financing in optimal ratios based on the rate of return of leverages. The overall capital for companies like this is obtained by weighted average of all capital composition. This overall cost of capital is called the weighted average cost of capital which reviews the costs of debt, equity, and preferred stock.

Hence option “c. weighted average cost of capital” is correct answer.