What indicates that there is no capital charge when calculating capital charge?

• A. The weighted average is equal to the purchase price
• B. The weighted average is less than the purchase price
• C. The weighted average is greater than the purchase price
• D. The weighted average is the same as the market value

Answer: (C)

A capital charge is essentially a cost of capital that reflects the risk and opportunity cost of the funds used to purchase an asset. When determining whether there is a capital charge, one key factor is the relationship between the weighted average cost of capital and the asset's purchase price or market value.

In this context, when the weighted average is greater than the purchase price, it indicates a situation where the return expectations (reflected in the weighted average) exceed the actual cost or value of the investment. This typically suggests that there is a premium attached to the capital being employed, signifying a capital charge.

From a financial perspective, if the weighted average is equal to or less than the purchase price, it may indicate that the capital being tied up in the asset is not incurring additional costs beyond the purchase price, reflecting efficient investment practice.

Understanding this concept is essential for determining the overall profitability and performance of investments in relation to the cost of capital, enabling better decision-making for future investments and capital allocation strategies.