Question

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? a. Retained earnings. b. Preferred stock. c. Accounts payable. d. Long-term debt. e. Common stock.

Answer 1

Answer:

c. Accounts payable.

Explanation:

The capital structure is a mix of debt and the equity

And, the formula to compute the weighted average cost of capital is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of  common stock) × (cost of common stock)

Since the account payable is the current liabilities and therefore it is not use for computing the WACC.