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Chapter 4: Q11-9DQ (page 360)

How are the weights determined to arrive at the optimal weighted average cost of capital?

Short Answer

Expert verified

The optimal weighted average cost of capital are arrived by inspecting different capital structures and using the mix that provides the minimum cost of capital. Multidimensional problem should be solved to determine the legitimate weights.

Step by step solution

01

Introduction to weighted average cost of capital (WACC)

The weighted average cost of capital (WACC) is the rate that an organization is expected to pay on average to all its shareholders to fund its assets. The weighted average cost of capital is generally alluded to as the organization's cost of capital.

02

The weights determined to arrive at the optimal weighted average cost of capital

In the method for computation of the cost of the different components in the capital structure the methods of assigning weights to these costs is significant. In the attempt to weight capital components in accordance with the desire to achieve a minimum overall cost of capital. This addresses an optimum capital structure.

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