Question

The weighted average cost of capital for a firm with debt is the:

Multiple Choice

• discount rate that the firm should apply to all of the projects it undertakes.

• rate of return a company must earn on its existing assets to maintain the current value of its stock.

• coupon rate the firm should expect to pay on its next bond issue.

• minimum discount rate the firm should require on any new project.

• rate of return debtholders should expect to earn on their investment in this firm.

Answer 1

Answer: The second option is correct.

Explanation:
The weighted average cost of capital is referred to as WACC.
It is the rate which a firm pays on an average to its security (like stock or bond) holders in order to finance its assets.
It is also referred to as a company's cost of capital and is used to discount the future cash flows and to determine the share price through valuation method.
If the WACC increases the present value of the future cash flows will decrease thus decreasing the share price and vice versa.
So, the rate of return a company must earn on its existing assets to maintain the current value of its stock is the weighted average cost of capital for a company with debt.