A composite of the cost of various sources of funds comprising a firm's capital structure is its:
A) Internal rate of return (IRR).
B) Weighted-average cost of capital (WACC).
C) Book (accounting) rate of return.
D) Modified internal rate of return (MIRR).
E) Accounting rate of return (ARR), after tax.

Question

Quizplus · Accepted Answer

The weighted-average cost of capital (WACC) represents the composite cost of funds raised from various sources, such as equity, debt, and preferred stock, based on their respective weights in the capital structure. It is used as a benchmark to evaluate the profitability of projects or investments that require funding from these sources. The WACC is calculated by multiplying the cost of each source by its weight, and then summing up the products.

A Composite of the Cost of Various Sources of Funds