Question

What is the purpose of calculating WACC, meaning how can it be used to calculate the current value of the firm and to assess if the firm creating value?

Answer 1

WACC is Weighted average cost of capital which helps the company and the investor know the capital structure of debt and equity percentages.Also suppliers who have lent the money, and investors who have funded the share through ownership would want to know how much the company is managing it's capital by balancing it's debt with respect to the equity.  

Purpose of WACC is to evaluate the company's worth by calculating the minimum rate of return that is expected by the investors. This acts as a financial tool where the investors can get to know if the company's returns are meeting the WACC value and can make their own investment decisions.

It can be calculated with the help of cost of equity and cost of debt , formula for calculating WACC the formula is as below:

WACC = [total cost of equity X (Market value of equity/ (Equity+Debt))] + [total cost of Debt X (Market value of Debt/(Equity+Debt) (1-tax rate)}

Everytime company invests into the capital and is able to create additional value, it's creating the firm's value overall which can make an investor stay put else, the company might start losing it's shareholder's wealth.