Cost of capital

Why does borrowed capital from the bank have a cost?

• It increases company equity

• It incurs interest payments

• It reduces cash flow
  

• It decreases liabilities

In the WACC context, which component represents borrowed capital?

• Equity

• Debt

• cash flow

• retained earnings

Which statement best aligns with the video's explanation of "cost" when capital is borrowed?

• It’s the dividends paid to shareholders

• It’s an accounting expense unrelated to borrowing

• It’s the interest charged by the lender

• It’s the principal repayment

A supermarket finances its operations using 60% equity and 40% debt. What does the "weighted" part of WACC mean in this context?

• Both debt and equity are given equal importance regardless of their proportion

• Only equity cost is considered, since retailers prefer own funds

• Costs of debt and equity are multiplied by their respective shares in total financing

• Only debt cost is considered, since it is cheaper

A large retail chain is considering opening 10 new stores. The project is expected to generate a return of 11%. The company’s current WACC is 9%. Based on WACC principles, what should the retailer decide and why?

• Reject the project, because 11% is too close to 9%

• Accept the project, because its return exceeds the cost of capital

• Reject the project, because WACC does not apply to retail decisions

• Accept the project, but only if financed entirely with debt since it’s cheaper

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