Which of the following is NOT a component of WACC?

The correct answer is the market risk premium because it is not a direct component of the Weighted Average Cost of Capital (WACC) calculation. WACC is primarily concerned with the costs associated with the different sources of capital that a company uses, which include the cost of equity and the cost of debt, as well as the proportions of each financing method in the overall capital structure.

The cost of equity reflects the return that equity investors expect on their investment, while the cost of debt represents the effective rate that a company pays on its borrowed funds. The proportions of equity and debt determine how each component is weighted in the overall average.

The market risk premium, on the other hand, is a measure used in the Capital Asset Pricing Model (CAPM) to determine the expected return on equity, but it is not calculated or utilized directly in the WACC formula. Thus, while the market risk premium can inform the estimation of the cost of equity, it is not a required component in the WACC calculation itself.