Question

Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital as it applies to capital budgeting?

Select one:
A. Long-term debt.
B. Common stock.
C. Accounts payable.
D. Preferred stock.
E. All of the above are considered capital components for WACC and capital budgeting purposes.

Answer 1

Answer:

Option C. Accounts payable is not considered a capital component to calculate the WACC.

Explanation:

The reason is because Accounts Payables is not a component of Debt or Equity, it's a component of Working Capital.

To calculate the WACC you have to considered Cost of Equity and Cost of Debt, Cost of Equity as the opportunity cost of Capital and Debt as the interest rate paid for that.

Rememer that Accounts Payable doesn't have a financial cost (interest rate) to be paid, it only includes the amount of the bills.    

Hoping it has been clear.

Greets,

Milton R.