Explain what is meant by the “weighted cost of capital” and how it is

Explain what is meant by the “weighted cost of capital” and how it is used in capital budgeting.

What will be an ideal response?

ANSWER

The proportion of each type of financing (debt, equity and retained earnings) in the firm’s capital structure, and applying these percentages to the opportunity costs of capital associated with financing a prospective capital outlay. This weighted average of the opportunity cost of capital then is used to discount projected cash flows back to a net present value.