Series 79 practice questioneasyWACC and Cost of Capital
The weighted average cost of capital (WACC) represents:
- AThe return required only by equity investors
- BThe cost of debt financing only
- CCapital-weighted return required by all investors✓ Correct answer
- DThe risk-free rate plus the market risk premium
Explanation
Why C — Capital-weighted return required by all investors
WACC is the weighted average of the cost of equity and the after-tax cost of debt, weighted by their respective proportions in the company's capital structure. It represents the minimum return a company must earn on its existing asset base to satisfy all capital providers. WACC is used as the discount rate in enterprise DCF analysis because the cash flows being discounted (unlevered free cash flows) are available to both debt and equity holders.
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