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 weeks ago

What is Weighted Average Cost of Capital (WACC)?

Charlotte's Crochet Shoppe has 14,300 shares of common stock outstanding at a price per share of $75 and a rate of return of 11.61%. The company also has 280 bonds outstanding, with a par value of $2000 per bond. The pre-tax cost of debt is 6.13% and the bonds sell for 97.2% of the par. What is the weighted average cost of capital (WACC), if the tax rate is 40%?

The weighted average cost of capital (WACC) is calculated as the weighted average of cost of...

The weighted average cost of capital (WACC) is calculated as the weighted average of cost of component capital, including debt, preferred stock and common equity. In general, debt is less expensive than equity because it is less risky to the investors. Some managers may intend to increase the usage of debt, therefore increase the weight on debt (Wd). Do you think by increasing the weight on debt (Wd) will reduce the WACC infinitely? What are the benefits and costs of...

evaluate Weighted Average Cost of Capital (WACC) concepts, why is WACC an important tool in the...

evaluate Weighted Average Cost of Capital (WACC) concepts, why is WACC an important tool in the evaluation of capital expenditure programs, financial structuring strategies, capital projects, equity recapitalization, dividend determination, financing working capital expansions, and evaluate WACC methods comparing other financial analysis applications used with WACC. can you also include your references.

In at least 200 words, weighted average cost of capital (WACC), how and why is it...

In at least 200 words, weighted average cost of capital (WACC), how and why is it used. and why is it important?

20. Weighted Average Cost of Capital (WACC) primarily focused on: A.definition of “Weighted Average Cost of...

20. Weighted Average Cost of Capital (WACC) primarily focused on: A.definition of “Weighted Average Cost of Capital“ (WACC) and concept of costs of equity B.and debt, method of calculation C.WACC use in corporate financial management D. factors that affect the cost of equity and debs E. nature of costs of equity and debt calculation using the CAPM model 21. Business risks and their typology with focus on: A.risk classification criteria and their categorization according to the industry of the enterprise...

Define the Average Cost of Capital (Weighted Average Cost of Capital) and explain why a company...

Define the Average Cost of Capital (Weighted Average Cost of Capital) and explain why a company should earn at least its weighted average cost of capital in new investments. What are the financial implications if it does not?

What are the components of the weighted average cost of capital (WACC) and how do they...

What are the components of the weighted average cost of capital (WACC) and how do they differ for an MNE compared to a purely domestic firm? There are potential benefits and risks from raising capital on global markets. Discuss the pros and cons in terms of risk of raising capital on global markets. Briefly discuss and explain the global CAPM.

What does a company’s weighted average cost of capital (WACC) represent?

2. Find the weighted average cost of capital for COSTCO a) explain how the WACC is...

2. Find the weighted average cost of capital for COSTCO a) explain how the WACC is calculated b) explain the WACC in the context of hurdle rate, return on invested capital(ROIC), an optimal capital structure, and an optimal capital budget.

What is the weighted average cost of capital computed (WACC) and how is it computed? Discuss...

What is the weighted average cost of capital computed (WACC) and how is it computed? Discuss the two major conditions required for a company to be able to use its current weighted average cost of capital to evaluate a new project's cash flows. (maximum length guide: about 150 words)

Question