If a firm will use debt as well as equity funds next year, the ____ is the correct discount rate to use in the capital budgeting models (NPV, etc.)

A) component cost of equity
B) weighted average cost of capital
C) historical cost of funds
D) All of the above are correct

Question

Marie Forges · Accepted Answer

Final Answer : B, Explanation :  When a firm uses both debt and equity funds in its capital structure, the weighted average cost of capital (WACC) is the appropriate discount rate to use in the capital budgeting models since it considers the cost of both debt and equity. The cost of debt is represented by the interest expense, which is tax-deductible, while the cost of equity is calculated using the component cost of equity. The historical cost of funds is not relevant in determining the appropriate discount rate.

If a firm will use debt as well as equity funds next year, the ____ is the correct discount rate to use in the capital budgeting models (NPV, etc.)

A) component cost of equity
B) weighted average cost of capital
C) historical cost of funds
D) All of the above are correct

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Learning Objectives

Learning Objectives

Related questions

If a firm will use debt as well as equity funds next year, the ____ is the correct discount rate to use in the capital budgeting models (NPV, etc.) A) component cost of equityB) weighted average cost of capitalC) historical cost of fundsD) All of the above are correct

Definitions

Learning Objectives

Learning Objectives

Related questions

If a firm will use debt as well as equity funds next year, the ____ is the correct discount rate to use in the capital budgeting models (NPV, etc.)

A) component cost of equity
B) weighted average cost of capital
C) historical cost of funds
D) All of the above are correct