Weighted Average Cost of Capital
What It Measures
The weighted average cost of capital (WACC) is the rate of return that the providers of a company’s capital require, weighted according to the proportion each element bears to the total pool of capital. Why It Is Important

WACC is one of the most important figures in assessing a company’s financial health, both for internal use (in capital budgeting) and external use (valuing companies on investment markets). It gives companies an insight into the cost of their financing, can be used as a hurdle rate for investment decisions, and acts as a measure to be minimized to find the best possible capital structure for the company. WACC is a rough guide to the rate of interest per monetary unit of capital. As such, it can be used to provide a discount rate for cash flows with similar risk to that of the overall business. How It Works in Practice

To calculate the weighted average cost of capital, companies must multiply the cost of each element of capital for a project—which may include loans, bonds, equity, and preferred stock—by its percentage of the total capital, and then add them together. For example, a business might consider investing $40 million in an expansion program. The financing is raised through a combination of equity (such as $10m of stock with an expected 10% return) and debt (for example, $30m bond issue, with 5% coupon). In this simple scenario, WACC would be calculated as follows: Equity ($10m) divided by total capital ($40m) = 25%, multiplied by cost of equity (10%) = 2.5% Debt ($30m) divided by total capital ($40m) = 75%, multiplied by cost of debt (5%) = 3.75% The two results added together give a weighted cost of capital of 6.25%. In reality, interest payments are tax deductible, so a more accurate formula for WACC is: WACC = DP × DC – T + EP × EC

where DP is the proportion of debt financing, DC is the cost of debt financing, T is the company’s tax rate, EP is the proportion of equity finance,...

...
Capital Budgeting Analysis
Amanda Kocanda, DeUndre’ Rushon,
HuongTran,& Morgan Gibreal
MBA 612, Financial Strategy
October 28, 2014
Bellevue University
Abstract
Within this paper, an overview of the general capital budgeting process and how it is implemented within organizations is defined and reported. Key terms related to capital budgeting are also defined. Risk analysis based on the Net Present Value (NPV) is performed on the...

...leadership, we will explain capital structure and determine weightedaveragecost of capital (WACC) from the assumption provided by Mary Francis. Furthermore, we will show how WACC and Capital Structure can be leveraged to find out the viability of the capital project. Additionally, we will explain marginal cost of capital. To close, we will make a recommendation on...

...WEIGHTEDAVERAGECOST OF CAPITAL FOR DELL COMPUTER
1) From the SEC website, the balance sheet of Dell Computer reveals a
Book value of debt = $3,394,000,000 and
Book value of equity = $4,625,000,000
The same balance shows the breakdown of the long-term debt (book values) in table 1.
Table 1
Coupon Rate
(%) Maturity Book Value
(Face Value in million $)
3.38 06/15/2012 400
4.70 04/15/2013 599
5.63 04/15/2014 500
5.65...

...Cost of Capital questions
and practice problems
Questions
1. What does the WACC measure?
2. Which is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm’s debt and equity? Assume you are an outsider to the firm.
3. Why are market-based weights important?
4. Why is the coupon rate of existing debt irrelevant for finding the cost of debt...

...Cost of Capital
Definition: cost of capital is the rate of return that a company must earn on its project investments to maintain its market value and attract funds. The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. The...

...ogCost of capital
First of all I would like to say the I wanted to calculate the cost of debt and cost of equity but the information given in the statements are missing the items needed to calculate the cost of debt and the cost of equity but I would like to analyze the information related to this part
The market capitalization already increased in year 2010to 7,016 million from the previous year which was 3,805 million...

...Chapter 8
The Cost of Capital
236
CHAPTER 8—THE COST OF CAPITAL
TRUE/FALSE
1. Capital refers to items on the right-hand side of a firm's balance sheet.
2. The component costs of capital are market-determined variables in as much as they are based on investors' required returns.
3. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon...

...What is cost of capital?
The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment. It is used to evaluate new projects of a company, as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.
Importance
The concept of cost of capital is a...

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