A firm is currently taking on two projects with an individual cost of capital of 10 percent and 12 percent for each of the projects. That means that the before-tax cost of capital for the firm must be between 10 and 12 percent.

Question

Quizplus · Accepted Answer

The individual cost of capital for each project does not necessarily indicate the before-tax cost of capital for the entire firm. The firm's weighted average cost of capital (WACC) takes into account the proportion of each source of financing used and their respective costs, so the before-tax cost of capital for the firm can be different from 10-12 percent.

A Firm Is Currently Taking on Two Projects with an Individual