Asked by Joycelyn Acheampong on Jun 30, 2024
Verified
The weighted average of a firm's expected return on its stock and the interest rate that it pays for debt is known as the:
A) internal rate of return.
B) opportunity cost of capital.
C) risk-free rate of return.
D) company cost of capital.
Weighted Average
A mean where each value in the data set is multiplied by an assigned weight before the final calculation is performed.
Expected Return
Expected return is the anticipated amount of profit or loss an investment is likely to generate over a specific period.
Company Cost
Expenses incurred by a business in the process of earning revenues, often categorized into fixed and variable costs.
- Evaluate the capital cost for companies, taking into account the impact of debt and equity.
Verified Answer
VA
Virginia AguilarJul 07, 2024
Final Answer :
D
Explanation :
The weighted average of a firm's expected return on its stock and the interest rate that it pays for debt is known as the company cost of capital. This is the minimum rate of return that a company must earn on its investments in order to satisfy its investors and creditors. It is used in evaluating potential investment opportunities, as any project or investment must generate returns that exceed the company cost of capital in order to be considered worthwhile.
Learning Objectives
- Evaluate the capital cost for companies, taking into account the impact of debt and equity.