Need business and finance help with the Weighted Average Cost of Capital 3

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Why is WACC a more appropriate discount rate when doing capital budgeting?

Dec 1st, 2015

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The Weighted Average Cost of Capital (WACC) is a composite of the individual costs of financing incurred by each capital source. A firm’s weighted cost of capital is a function of (1) the individual costs of capital, (2) the capital structure mix, and (3) the level of financing necessary to make the investment.

The WACC is a more appropriate discount rate when doing capital budgeting because it combines the weighted average cost of each of the resources of capital that is used by a firm to finance its investment, hence it is used as the minimum rate of return the firm would be willing to accept when conducting its capital budget.


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Dec 1st, 2015

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