What is the weighted average cost of capital (WACC)? Explain with examples. and Why is it...

What is the weighted average cost of capital (WACC)? Explain with examples.

and Why is it different from the rate of return to investors? Explain with examples.

Expert Solution

Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital is the combined cost of capital incurred by the firm to raise finance either from debt or equity.

Formula to calculate the WACC is as follows:

Rate of return:

Rate of return is the return which an investor expects from the project.

The major difference between rate of return and weighted average cost of capital is that the rate of return is the minimum rate which an investor expects from the project.

For instance, if the WACC is 5.74% then the project must give return of 5.74% or more. Then only the investor should accept the project. The rate of return is used to evaluate investment project whereas the WACC is the cost incurred to raise the capital.

jeff jeffy answered 2 hours ago

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