The weighted average cost of capital is used as a discount rate because
A) it is an indication of how much the firm is earning overall.
B) as long as the cost of capital is earned, the common stock value of the firm will be maintained.
C) it is comparable to the prevailing market interest rates.
D) returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to stockholders.

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is used as a discount rate because it represents the average cost of financing the firm’s assets. As long as the cost of capital (WACC) is earned, the firm will be able to maintain the value of its common stock. This is why WACC is used as the discount rate when evaluating investment opportunities or determining the value of a company.

The Weighted Average Cost of Capital Is Used as a Discount