The cost of capital is defined as the
A) simple average of the interest rates of all debt outstanding.
B) simple average of the cost of debt and equity.
C) weighted average of the interest rates of all debt outstanding.
D) weighted average of the cost of debt and equity.

Question

Quizplus · Accepted Answer

The definition of cost of capital is the weighted average of the cost of debt and equity. This is because a company's capital structure typically includes both debt and equity financing, and each type of financing has a cost associated with it (i.e. interest on debt or required return for equity investors). Therefore, the cost of capital takes into account both sources of financing and their respective costs to determine the overall cost of raising capital for the company.

The Cost of Capital Is Defined as the