Average Return on Investment
Weighted Average Cost of Capital
Net Profit Ratio
Average Cost of borrowing
Answer is Right!
Answer is Wrong!
The correct answer is: B. Weighted Average Cost of Capital
The weighted average cost of capital (WACC) is a measure of a company’s overall cost of capital. It is calculated by taking the weighted average of the company’s cost of debt and its cost of equity. The cost of debt is the interest rate that the company pays on its loans, while the cost of equity is the rate of return that investors expect to earn on their investment in the company. The WACC is used to calculate the company’s hurdle rate, which is the minimum rate of return that the company must earn on its investments in order to satisfy its investors.
The other options are incorrect because:
- Average Return on Investment (ROI) is a measure of a company’s profitability. It is calculated by dividing the company’s net income by its total assets. ROI does not take into account the company’s cost of capital, so it is not a good measure of the company’s minimum rate of return.
- Net Profit Ratio is a measure of a company’s profitability. It is calculated by dividing the company’s net income by its sales. Net Profit Ratio does not take into account the company’s cost of capital, so it is not a good measure of the company’s minimum rate of return.
- Average Cost of borrowing is the average interest rate that a company pays on its loans. It is calculated by dividing the company’s total interest expense by its total debt. Average Cost of borrowing is not a good measure of the company’s minimum rate of return because it does not take into account the company’s cost of equity.