A firm is considering using its own funds to finance an investment, but needs an estimate of the discount rate. Currently the firm is earning 4 percent on funds held in a bank account and 6 percent on funds held in stocks. If the firm has 20 percent of its funds in the bank account and the remaining 80 percent in stocks, what is the firm's weighted average cost of capital?
A)5.6 percent
B)5.8 percent
C)4.4 percent
D)4.2 percent

Question

Quizplus · Accepted Answer

The firm's weighted average cost of capital (WACC) is calculated by taking the weighted average of the returns on the different types of investments it holds, which in this case are the bank account and stocks. The calculation is as follows: (0.20 * 4%) + (0.80 * 6%) = 0.8% + 4.8% = 5.6%.

A Firm Is Considering Using Its Own Funds to Finance