Q. What is denoted by weighted average cost of capital OR Composite? How is it calculated? Exemplify with an example.
Ans. Weighted Average Cost of Capital: - Capital formation of a company consists of different sources of capital. Cost of these diverse sources of capital is as well calculated by different methods. Therefore after the calculation of cost of capital of these diverse sources of capital a practical complexity happen as to what is the cost of overall capital structure of the firm. In order to resolve this problem finance managers developed the concept of Weighted Average Cost of capital. It is as well known as Composite Cost or Overall Cost.