Discuss the difference of Firm’s Weighted Average Cost of Capital (WACC), Divisional WACC, Project Specific WACC...

Discuss the difference of Firm’s Weighted Average Cost of Capital (WACC), Divisional WACC, Project Specific WACC

between “Cash provided by operations” and “Free Cash Flows.”

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Expert Solution

Weighted Average Cost of Capital (WACC) : WACC is the firm's overall cost of capital in which every categories in the capital structure are proportionately weighted. WACC is used when a firm has projects which have similar risk.

Divisional WACC : The firms with two or more divisions have different risk for different divisions. Divisional WACC reflects the risk of each division. It is used when the projects in each division have different risk level.

Project Specific WACC : Project Specific WACC measures the project wise risks. It is used when the risk level is different for different projects. This method is suitable for calculating the cost of project which has significant

Cash provided by operations : It is the cash flow generated by the company as a part of its business operations. This cash flow is calculated by deducting the expenses from revenue of the company.

Free Cash Flows : This is the funds available for the distribution to shareholders. It is the cash flow available after meeting operating expenses and capital expenditure. It is the amount that is earned by shareholders for owning the shares of the company.

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