The weighted average cost of capital (WACC) is an important tool for the capital structure. Go...

The weighted average cost of capital (WACC) is an important tool for the capital structure. Go to the website Yahoo! Industry Summary and look at Facebook Inc. and Alphabet Inc. Calculate the WACC for the two firms. How do the WACCs compare? Are the WACCs what you would expect? What causes the differences between the two firms’ WACCs?

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Expert Solution

The basis of comparison of WACC for any firm is the capital base used. The comparisons are made considering the sources of capital used in capital structure. One company may use just equity and debt in their capital structure while other company may use equity, debt, preference capital and retained earnings. comparisons are also made on the basis of the extent to which each source is used.

The WACC is the weighted average cost of all capital sources used expressed in percentage. It is also the required rate of return i.e the minimum amount of income needs to be generated to break even.

The difference between two firm's WACC is made on the basis of different type of sources used. The sources of capital used by both facebook and alphapbet are similar but their magnitude differs. Common stock of facebook at present is at 0 while for alphabet it is $25,922,000. Retained earnings of FB constitue $33,990,000 while Alphabet's RE constitute $61,262,000. FB has a capital surplus while Alphabet does not. Long term debt of FB is at 0 while for alphabet it is $2.236 million.

jeff jeffy answered 1 year ago

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