A firm's overall cost of capital is just the average of the costs of its separate sources of invested funds.

Question

Quizplus · Accepted Answer

The overall cost of capital is not simply the average of the costs of its separate sources of invested funds because the different sources of funds have different risk levels and tax implications. The overall cost of capital takes into consideration the weights of each source of funding and their respective costs, after adjusting for taxes, to arrive at a weighted average cost of capital (WACC).

A Firm's Overall Cost of Capital Is Just the Average