Why would a firm not use its weighted average cost of capital (WACC) to evaluate all proposed investments?
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The weighted average cost of capital is a calculation of a company’s cost of capital wherein each class of capital is proportionately weighted. All the sources of capital- common stock, preferred stock, bonds & other long-term debt – are covered in a Weighted average cost of capital computation. All else equal, the Weighted average cost of capital of a company rises as the beta & rate of return on equity rises, as an increase in Weighted average cost of capital notes a fall in valuation & a bigger risk.