Explain in your own words the logic of using the weighted average cost of capital as the discount rate for capital projects.

Question

Quizplus · Accepted Answer

The Answer is The WACC calculates the percentage cost to the firm for using money from all sources, internal and external. The component cost for each source is calculated as the required return to the investor, including any tax effects or flotation costs. The overall cost is a weighted average of the component costs, with the weights calculated as the percentage of invested money from each source divided by the total amount of money invested in the firm. Thus, the overall cost takes into account not only how much it costs for each source of funds, but how much use is made of each source of funds.

Explain in Your Own Words the Logic of Using the Weighted