The Overall Weighted Average Cost of Capital Is Used Instead

question 74

Multiple Choice

The overall weighted average cost of capital is used instead of costs for individual sources of funds because

• A) the use of the cost for individual sources of capital would make investment decisions inconsistent.
• B) a project with the highest return would always be accepted under the specific cost criteria.
• C) investments funded by low-cost debt would have an advantage over other investments.
• D) the use of the cost for specific sources of capital would make investment decisions inconsistent, and investments funded by low-cost debt would have an advantage over other investments.

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Definitions:

Margin

The difference between the selling price of a product or service and its cost of production, or the amount of equity an investor has to deposit to borrow money for investing.

Futures Contracts

These are standardized legal agreements to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.

Buyers and Sellers

The participants in a market who determine the demand for and supply of goods and services, influencing prices and market dynamics through their transactions.

Parity Values

Equal-valued metrics that compare different financial instruments, such as conversion parity between options and stocks.