If a firm will use debt as well as equity funds next year, the ____ is the correct discount rate to use in the capital budgeting models (NPV, etc.)

Question

Quizplus · Accepted Answer

When a firm uses both debt and equity funds in its capital structure, the weighted average cost of capital (WACC) is the appropriate discount rate to use in the capital budgeting models since it considers the cost of both debt and equity. The cost of debt is represented by the interest expense, which is tax-deductible, while the cost of equity is calculated using the component cost of equity. The historical cost of funds is not relevant in determining the appropriate discount rate.

If a Firm Will Use Debt as Well as Equity