What is the weighted average cost of capital (WACC)?

• a.)
• The opportunity cost of foregone investments plus the risk of borrower default.
• b.)
• The average of the interest rates an organization pays on its preferred and common stock.
• c.)
• The present value of future cash flows to an organization.
• d.)
• The combination of interest rates being incurred from both debt and equity.

Using the following variables, calculate an organization's cost of debt on a $100,000 bond.

• Rf: 2%
• Credit-risk rate: 6%
• t: 20%
• a.)
• $7,840
• b.)
• $6,400
• c.)
• $8,000
• d.)
• $1,600

The bond yield plus risk premium (BYPRP) approach is useful for determining __________.

• a.)
• the value of a company's debt
• b.)
• the value of a company's private equity
• c.)
• the value of a company's publicly traded equity
• d.)
• the overall value of a company