In the WACC formula, Ke stands for _____________.a.Cost of equityb.Weight of debt financingc.Cost of debt after taxd.Cost of debt financing

Break Down the Problem

1. Identify the meaning of Ke in the Weighted Average Cost of Capital (WACC) formula.
2. Evaluate the options provided to determine the correct answer.

Relevant Concepts

• WACC is expressed as: $WACC = \left( \frac{E}{V} \times K_e \right) + \left( \frac{D}{V} \times K_d \times (1 - T) \right)$ 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 this formula, $K_e$ represents the cost of equity, which is the return expected by equity investors given the risk of investing in the company's equity. This is distinct from $K_d$, which denotes the cost of debt.

Verify and Summarize

Among the choices:

• a. Cost of equity - Correct
• b. Weight of debt financing - Incorrect
• c. Cost of debt after tax - Incorrect
• d. Cost of debt financing - Incorrect

Final Answer

a. Cost of equity