The Rate should be : The arithmetic average of 12.4 percent and 18.7 percent .
What is WACC?
The Weighted Average Cost of Capital (WACC) is one of the key inputs in discounted cash flow (DCF) analysis and is frequently the topic of technical investment banking interviews.
The WACC is the rate at which a company’s future cash flows need to be discounted to arrive at a present value for the business. It reflects the perceived riskiness of the cash flows.
WACC Formula
Below we present the WACC formula. To understand the intuition behind this formula and how to arrive at these calculations, read on.
Where:
Debt = market value of debt
Equity = market value of equity
rdebt = cost of debt
requity = cost of equity
Therefore, we can conclude that the correct option is C.
Your question is incomplete, but most probably your full question was:
A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model. The market rate of return is 13.5 percent. What rate should the firm use as the cost of equity when computing the firm's weighted average cost of capital (WACC)?
A. 12.4 percent because it is lower than 18.7 percent
B. 18.7 percent because it is higher than 12.4 percent
C. The arithmetic average of 12.4 percent and 18.7 percent
D. The arithmetic average of 12.4 percent, 13.5 percent, and 18.7 percent
E. 13.5 percent
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