Question

Which of the following is NOT a capital component when calculating the weighted average cost of...

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?

a. Common stock

b. Notes Payable - Current

c. Inventory

d. Preferred stock

Homework Answers

Answer #1

Answer :-

(C) Inventory

Explanation :- Inventory is not a capital component as inventory is a current asset , so, it is not used in weighted average cost of capital (Wacc) for use in capital budgeting.

Explanation for rejection of other points :-

(a) Common stock is a capital component which is included in WACC calculation.

(b) Notes payable is short term debt which is also a capital component and is included in WACC calculation.

(d) Preferred stock is also a source of finance which provide funds so, it is also a capital component and used in WACC calculation.

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