The use of common stock equity in the weighted average cost of capital is always (K_e) and not (K_n), the cost of new common stock.
Either or both may be used; it is situation-dependent.

Question

The use of common stock equity in the weighted average cost of capital is always (K_e) and not (K_n), the cost of new common stock. Either or both may be used; it is situation-dependent.

Quizplus · Accepted Answer

The use of common stock equity in the weighted average cost of capital calculation may depend on the situation. While the cost of new common stock (K_n) can be used in situations where the company is raising new capital, the cost of existing common stock (K_e) may be more appropriate in situations where the company is using already issued stock. Therefore, both the cost of new and existing common stock may be used in the weighted average cost of capital calculation depending on the circumstances.

The Use of Common Stock Equity in the Weighted Average