Which calculation helps determine the appropriate mix of debt and equity in a company?

The Weighted Average Cost of Capital (WACC) calculation is a crucial financial metric used to determine the appropriate mix of debt and equity within a company. WACC reflects the average rate of return a company is expected to pay to its security holders to finance its assets. By calculating WACC, a company can assess the cost of each component of its capital structure (debt and equity) weighted according to their proportion in the overall capital mix.

This calculation is essential for evaluating investment opportunities and decision-making concerning financing strategies. A lower WACC indicates a more favorable capital structure, as it suggests that the company can support its operations and growth with a lower cost of capital. It helps management determine the optimal balance that minimizes costs while maximizing shareholder value, thereby directly impacting investment returns and financial strategy.

In contrast, other options like Return on Investment (ROI), Net Present Value (NPV), and Economic Value Added (EVA) serve different purposes. ROI measures the profitability of an investment relative to its cost, NPV evaluates the profitability of future cash flows compared to initial investments, and EVA assesses a company's financial performance by measuring its true economic profit. While these metrics are valuable for financial analysis, they do not directly address the mix of debt and equity capital.