Question

The average of a company's cost of equity, cost of preferred, and aftertax cost of debt that is weighted based on the company's capital structure is called the:
a. reward-to-risk ratio.

b. weighted capital gains rate.

c. structured cost of capital

d. weighted average cost of capital.

Answer 1

Answer: Option D

                                         

Explanation: In simple words, weighted average cost of capital refers to the   amount of return that the investors of a company are expecting. It includes all the security holders of the company and calculates the rate as per the weights that are applicable in the target capital structure.

   Weighted average cost of capital is of high importance as it helps an organisation to clearly evaluate and analyze its current financial situation and if they need to change their existing capital structure.

A high WACC calls for higher profits as company has to make sure that security holders gets their returns and vice versa.