Question 1: Which of the following is NOT a capital component when calculating t

Question

Question 1: Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACCforuse in capital budgeting? (6 points) A) Long-term debt (B) Accounts payable C) Retained earnings (D) Common stock E) Preferred stock Question 2: LaPange.Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%, which of the following projects (A, B, and C) should the company accept? (6 points (A) Project B, which is of below-average risk and has a return of 8.5% [b] Project C, which is of above-average risk and has a return of 11% C) Project A, which is of average risk and has a return of 9% (D) None of the projects should be accepted E) All of the projects should be accepted

Explanation / Answer

Answer to Question 1:

B. Accounts payable.

Accounts payable is not a capital component when calculating the weighted average cost of capital for use in capital budgeting.

Accounts payable are the outstanding amounts due on the invoice and bills one receives from vendors and service providers. it is an obligation which generates during the course of business for the short period of time and involve only the payment of invoice amount.

where as WACC is basically the opportunity cost of investor which provides them the minimum required rate of return, which they can earn if they had not invested the fund in the business. it involves payment of principle amount as well as return and the investment is generally for the long term.

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