The overall weighted average cost of capital is used instead of costs for individual sources of funds because
A) the use of the cost for individual sources of capital would make investment decisions inconsistent.
B) a project with the highest return would always be accepted under the specific cost criteria.
C) investments funded by low-cost debt would have an advantage over other investments.
D) the use of the cost for specific sources of capital would make investment decisions inconsistent, and investments funded by low-cost debt would have an advantage over other investments.

Question

Quizplus · Accepted Answer

The use of the cost for specific sources of capital would make investment decisions inconsistent because it would favor investments funded by low-cost debt. Therefore, using the overall weighted average cost of capital provides a more accurate measure of the cost of capital for the entire firm, which considers the proportion of each source of funds used. This ensures that investment decisions are consistent and balanced.

The Overall Weighted Average Cost of Capital Is Used Instead