Chartered Financial Analyst (CFA) Level 1 Practice Exam 2025 - Free CFA Level 1 Practice Questions and Study Guide

The weighted average cost of capital (WACC) is calculated by weighting the average cost of equity and the cost of debt according to their proportions in a firm's capital structure. This involves taking into account the specific costs associated with each type of financing—equity and debt— and applying the appropriate weights to reflect how much of the total capital each component represents.

In practical terms, the cost of equity typically reflects the return required by equity investors based on the perceived risk of the company’s equity, while the cost of debt reflects the effective rate that the company pays on its borrowed funds, adjusted for the tax benefits associated with debt financing. By combining these elements with their respective weights, WACC provides a holistic view of the overall cost of capital for a company, making it a critical metric used in financial decision-making, such as evaluating investment opportunities and determining valuation.

The other methods mentioned involve either selective components or entirely different financial measures, which do not accurately represent the comprehensive calculation of WACC. Therefore, option C correctly encapsulates the methodology used in WACC computation.