A company determines its overall cost of capital by
A) multiplying the percentage of debt by its cost and adding the result to the percentage of equity multiplied by its cost
B) calculating the average cost of interest rates paid on loans and other debt instruments
C) calculating the percent of earnings paid out in dividends
D) multiplying the percentage of debt in the capital structure by the percentage of equity

Question

Quizplus · Accepted Answer

The overall cost of capital is determined by weighing the cost of debt and equity in the company's capital structure. This is done by multiplying the percentage of debt by its cost and adding the result to the percentage of equity multiplied by its cost. This calculation gives the weighted average cost of capital (WACC) which represents the average cost the company pays to finance its operations. B, C, and D are not accurate ways to calculate the overall cost of capital.

A Company Determines Its Overall Cost of Capital by