Which of the following statements is correct?
A) If the risk-free rate increases, it will have no impact on the weighted average cost of capital.
B) Investor returns are reduced when float costs increase, and therefore float costs reduce the weighted average cost of capital.
C) The weighted average cost of capital is a historical cost.
D) None of these choices are correct.

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is influenced by the risk-free rate because the cost of debt is part of the WACC calculation, and changes in the risk-free rate can affect interest rates. Float costs affect transaction costs but do not directly reduce WACC; they can impact investor returns but not in the way described. WACC is not a historical cost; it is a forward-looking measure that estimates the cost of capital a company expects to pay for its mix of debt and equity financing.

Which of the Following Statements Is Correct