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Does the Weighted Average Cost of Capital (WACC) account for demand?


Does the Weighted Average Cost of Capital (WACC) account for demand?

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Expert Solution

A typical weighted average cost of capital is about allocation of the cost of equity and cost of debt in their apportioned weights in the overall capital structure of the company and it is not accounting for the demand because it is not that sophisticated method which can predict the demand in advance, as it is related to forecasting.

Many organisations use risk weighted average cost of capital which would be highly modern and sophisticated version of weighted average cost of capital,which accounts for various kinds of risk and incorporate them in the overall capital structure of the company,and then find the cost of capital in order to suit the discounting rate.

The overall demand is not accounted for, in a normal weighted average cost of capital, but it will be accounted for in a risk weighted average cost of capital, because risk weighted average capital is highly modern and advanced version of WACC.

jeff jeffy answered 1 year ago
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