Only long-term debt should be used to compute the component cost of debt used in the WACC.

Question

Quizplus · Accepted Answer

The component cost of debt used in the WACC should reflect only the cost of long-term debt because it represents the cost of borrowing for a longer period of time. Short-term debt may have lower interest rates, but it also includes the risk of interest rate fluctuations and uncertain refinancing options. Therefore, using short-term debt in the computation of the WACC may underestimate the true cost of capital for the company.

Only Long-Term Debt Should Be Used to Compute the Component