Question

Discuss the factors that affect the WACC. Also discuss how these factors may differ somewhat from country to country.

(at least 150 words )

Answer 1

WACC refers to Weighted average cost of capital. As the words denote, if a firm a debt and equity in its capital structure, the WACC will be the weighted average of debt and equity in the capital structure. The cost of debt in generally the yield to maturity of the debt or the interest rate on bank loan taken and the cost of equity as per CAPM is the risk premium over the risk free rate. The risk premium is given by Beta times the market risk premium.

Relatively speaking, each country has its own country risks and risk free rates. The market risk premiums of each of the countries differ. The beta of the particular stock may differ from country to country as the stock is benchmarked against the market returns in that country. As a result of these factors, the cost of equity differs in each of these countries. The cost of debt is dependent on the default ,maturity and liquidity risks in these countries. Thus the overall cost of capital differs across the countries.