The weighted average cost of capital for a firm with debt is the:

Discount rate that the firm should apply to all of the projects it undertakes.

Rate of return a firm must earn on its existing assets to maintain the current value of its stock.

Coupon rate the firm should expect to pay on its next bond issue.

Minimum discount rate the firm should require on any new project.

Rate of return shareholders should expect to earn on their investment in this firm.

Question

Business

Jaelyn Livingston

9 March, 02:40

The weighted average cost of capital for a firm with debt is the:

Discount rate that the firm should apply to all of the projects it undertakes.

Rate of return a firm must earn on its existing assets to maintain the current value of its stock.

Coupon rate the firm should expect to pay on its next bond issue.

Minimum discount rate the firm should require on any new project.

Rate of return shareholders should expect to earn on their investment in this firm.

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Answers (1)

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Javier Forbes · Answer 1

Rate of return a firm must earn on its existing assets to maintain the current value of its stock.

Explanation:

The expected return is calculated on cost of capital, and that the cost of capital is weighted average cost of capital.

This is because weighted average cost of capital is the cost of capital which is based on the overall risk and weights of capital in the total capital of the company.

When the net return on total capital is less than weighted average cost of capital it means the company is not able to meet the total cost of capital and accordingly, the company faces some sort of losses.

Therefore, minimum return shall be equal to weighted average cost of capital.