The use of the weighted average cost of capital assumes that the firm is in its optimum capital structure range and the cost of each component stays constant over the range of financing.

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is generally used to evaluate the overall cost of capital for a firm, which is a combination of the cost of equity and debt. In order to use WACC accurately, it is assumed that the firm is in its optimal capital structure range, which means it has achieved the ideal balance between equity and debt financing that maximizes the firm's value. Additionally, it is assumed that the cost of each component of capital (debt and equity) stays constant over the range of financing. However, in reality, the cost of capital components may change depending on the level of financing, and the firm may not always be in its optimal capital structure range.

The Use of the Weighted Average Cost of Capital Assumes