When calculating the WACC, it is a standard practice to subtract ________ to compute the net debt outstanding.
A) equity
B) dividends
C) cash and risk-free securities
D) coupons

Question

Quizplus · Accepted Answer

When calculating the WACC (weighted average cost of capital), net debt outstanding is calculated by subtracting cash and risk-free securities from total debt. This is because cash and risk-free securities can be used to pay off debt, therefore reducing the overall debt burden and the associated interest costs. Dividends (B) and coupons (D) are not relevant to calculating net debt outstanding. Equity (A) is not subtracted from debt, instead, it is multiplied by the cost of equity to determine the equity portion of the WACC.

When Calculating the WACC, It Is a Standard Practice to Subtract