Question

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?

a. Accounts payable.
b. Common stock "raised" by reinvesting earnings.
c. Common stock raised by new issues.
d. Preferred stock.
e. Long-term debt.

Answer 1

Answer:

a.Accounts payable

Explanation

The weighted average cost of capital (WACC) is a weighted average of the (aftertax)  cost of all the sources of capital for the company.

The different costs are weighted according to their market values. This can be done using a formula or a table.

Usually, common stock, preferred stock as well as Long term debt are considered as Sources of capital for the company and are considered for the purpose of calculating WACC.

One other hand, Accounts payable shall always be paid by the entity within the next 12 months and is not considered as source of capital for the company and hence it is not included in the calculation of WACC.

Based on the above discussion, the answer is a.Accounts payable