In case the firm is all-equity financed, WACC would be equal to:Options :Cost of debtCost of equityNeither A nor BBoth A and B
Question
In case the firm is all-equity financed, WACC would be equal to:Options :Cost of debtCost of equityNeither A nor BBoth A and B
Solution
The correct answer is: Cost of equity.
Here's why:
WACC stands for Weighted Average Cost of Capital. It is the average rate of return a company is expected to pay its investors; the weights are the proportion of debt and equity in the company's capital structure.
If a firm is all-equity financed, it means the firm is only financed by equity and there is no debt. Therefore, the cost of debt is irrelevant in this case.
The WACC would be equal to the cost of equity because that's the only cost of capital for the firm.
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