In the WACC formula, Ke stands for _____________.a.Cost of debt after taxb.Cost of equityc.Weight of debt financingd.Cost of debt financing

Question

In the WACC formula, Ke stands for _____________.

a. Cost of debt after tax
b. Cost of equity
c. Weight of debt financing
d. Cost of debt financing

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Solution

Break Down the Problem

Identify what "Ke" represents in the context of the WACC (Weighted Average Cost of Capital) formula.

Relevant Concepts

Understand the components of the WACC formula, which is expressed as: $WACC = \frac{E}{V} K_e + \frac{D}{V} K_d (1 - T)$ $W A CC = \frac{E}{V} K_{e} + \frac{D}{V} K_{d} (1 - T)$ where:
- $E$ = market value of equity
- $D$ = market value of debt
- $V$ = total market value of the firm's financing (equity + debt)
- $K_e$ = cost of equity
- $K_d$ = cost of debt
- $T$ = tax rate

Analysis and Detail

In the WACC formula, $K_e$ specifically refers to the "cost of equity," which is the return that equity investors expect on their investment in the company.

Verify and Summarize

The other options provided (a, c, and d) do not correctly describe $K_e$ . Therefore, the correct answer is confirmed.

Final Answer

b. Cost of equity

This problem has been solved

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