When determining a firm's weighted average cost of capital (WACC), which of the following terms is NOT necessary?
A) the firm's weight of equity financing
B) the risk-free rate of return
C) the firm's weight of debt financing
D) All of the above are necessary to determine a firm's WACC.

Question

Quizplus · Accepted Answer

The risk-free rate of return is not a direct component in the calculation of a firm's weighted average cost of capital (WACC). WACC is calculated using the cost of equity, the cost of debt, and their respective weights in the firm's capital structure. The risk-free rate is used in determining the cost of equity (e.g., through the Capital Asset Pricing Model), but it is not a direct input in the WACC formula itself.

When Determining a Firm's Weighted Average Cost of Capital (WACC)