Final answer:
The WACC is the weighted average of the cost of equity and the after tax cost of debt. It takes into account the costs associated with different financing sources, proportionate to their usage in the company's capital structure. It also includes considerations for risk premiums and opportunity costs. The correct answer is O after tax cost of debt.
Step-by-step explanation:
The WACC is the weighted average of the cost of equity and the after tax cost of debt. The WACC is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. It provides a useful measure to assess the cost of financing projects by blending the cost of equity and the after tax cost of debt.
The WACC (Weighted Average Cost of Capital) is the weighted average of the cost of equity and the before-tax cost of debt. The cost of equity represents the rate of return expected by equity investors, while the before-tax cost of debt represents the interest rate on debt before taking into account the tax benefits of interest payments.
In determining the appropriate interest rate for valuing future payments, a financial investor considers the opportunity cost of investing financial capital, the rate of return on other available financial investments, and a risk premium if the investment is deemed to be risky.
For instance, if an investor evaluates an investment as especially risky, they may decide on a higher interest rate, such as 15%, to compensate for the risk undertaken.