Which of the following statements is correct?
A) If the risk-free rate increases, it will have no impact on the weighted average cost of capital.
B) Investor returns are reduced when float costs increase, and therefore float costs reduce the weighted average cost of capital.
C) The weighted average cost of capital is a historical cost.
D) None of the statements are correct.

Question

Quizplus · Accepted Answer

Option A is incorrect because the risk-free rate is a component of the cost of equity and therefore an increase in the risk-free rate will increase the cost of equity, thus affecting the weighted average cost of capital. Option B is incorrect because float costs do not reduce the weighted average cost of capital but increase it. Option C is also incorrect because the weighted average cost of capital is a forward-looking cost used to determine the minimum required return that a company must earn on its investments to satisfy its investors or shareholders.

Which of the Following Statements Is Correct