Which of these is the basic intuition behind calculating the cost of capital? A.

Question

Which of these is the basic intuition behind calculating the cost of capital?

A. Firms need to know what the cost of all their current sources of capital cost them.

B. When firms use multiple sources of capital, they need to calculate the current expenditures in a dollar amount format.

C. When firms use multiple sources of capital, they need to calculate the appropriate interest rate for valuing their firm's cash flows as a weighted average of the capital components.

D. When firms use multiple sources of capital, they need to calculate the appropriate interest rate after taxes for estimating current cash outflows.

Explanation / Answer

C. When firms use multiple sources of capital, they need to calculate the appropriate interest rate for valuing their firm's cash flows as a weighted average of the capital components.

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