Chartered Financial Analyst (CFA) Practice Exam Level 2

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What does WACC stand for?

Weighted Average Cost of Capital
Weighted Actual Cost of Capital
Weighted Aggregate Cost of Capital
Weighted Average Capital Cost

The correct answer is: Weighted Average Cost of Capital

WACC stands for Weighted Average Cost of Capital. This financial metric represents a firm's average cost of capital from all sources, including debt and equity, weighted by the proportion of each source in the overall capital structure. The significance of WACC lies in its role in investment decisions, valuation, and financial modeling. It is the rate of return that a company is expected to pay its security holders to finance its assets. Investors and analysts utilize WACC as a hurdle rate when evaluating investment opportunities, as it helps determine whether a project or investment earns more than it costs. By calculating WACC, firms can assess the efficiency of their capital structure and make informed decisions regarding funding projects, acquisitions, and financial strategies. Understanding WACC is crucial for anyone involved in finance, as it encapsulates how a company finances its operations and growth efficiently.