The weights used in calculating the firm's weighted-average cost of capital are equal to the proportion of debt and equity ____.
A) used to finance the project
B) used to finance the projects undertaken last year
C) in the industry average capital structure
D) in the firm's target capital structure
E) none of the above

Question

Quizplus · Accepted Answer

The weights used to calculate the firm's weighted-average cost of capital should reflect the target capital structure, which is the proportion of debt and equity that the company intends to use to finance its projects. This is because the cost of debt and equity and the overall cost of capital are based on the target capital structure, not the actual financing mix used in a specific project or the industry average.

The Weights Used in Calculating the Firm's Weighted-Average Cost of Capital