What does a company’s weighted average cost of capital (WACC) represent?

Solutions

Expert Solution

The weighted average cost of capital (WACC) is the cost of raising capital, with the weights representing the proportion of each source of financing that is used. It is used as a discount rate in net present value calculation. The target WACC is used to setting a capital structure strategy and evaluate a project that it is used as a discount rate in evaluation of the new projects of the company and company’s cost of capital depends on its riskiness. If the company decides to invest in a higher-risk project then its WACC should be higher.

Formula for the calculation of weighted average cost of capital (WACC) is

WACC = (E/ E+D+P) * re + (D/ E+D+P) * (1-t) * rd + (P/ E+D+P) * rp

Where, re is the cost of equity

And rd is the cost of debt

And rp is the cost of preferred stock

E is the value of common equity

D is the value of debt

P is the value of preferred stock

And t is the applicable tax rate

jeff jeffy answered 11 months ago

Next > < Previous

Related Solutions

What is Weighted Average Cost of Capital (WACC)?

Charlotte's Crochet Shoppe has 14,300 shares of common stock outstanding at a price per share of $75 and a rate of return of 11.61%. The company also has 280 bonds outstanding, with a par value of $2000 per bond. The pre-tax cost of debt is 6.13% and the bonds sell for 97.2% of the par. What is the weighted average cost of capital (WACC), if the tax rate is 40%?

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

The weighted average cost of capital (WACC) is calculated as the weighted average of cost of...

The weighted average cost of capital (WACC) is calculated as the weighted average of cost of component capital, including debt, preferred stock and common equity. In general, debt is less expensive than equity because it is less risky to the investors. Some managers may intend to increase the usage of debt, therefore increase the weight on debt (Wd). Do you think by increasing the weight on debt (Wd) will reduce the WACC infinitely? What are the benefits and costs of...

1. The Weighted Average Cost of Capital (WACC) is a. the rate at which a company’s future...

1. The Weighted Average Cost of Capital (WACC) is a. the rate at which a company’s future cash flows need to be discounted b. to arrive at a present value for the business. c. all of the above reflect the WACC d. the value of a company equals the present value of its future cash flows 2. Flotation Cost is a. the cost for servicing equity capital b. the cost for using debt capital c. the cost for using retained earnings d....

20. Weighted Average Cost of Capital (WACC) primarily focused on: A.definition of “Weighted Average Cost of...

20. Weighted Average Cost of Capital (WACC) primarily focused on: A.definition of “Weighted Average Cost of Capital“ (WACC) and concept of costs of equity B.and debt, method of calculation C.WACC use in corporate financial management D. factors that affect the cost of equity and debs E. nature of costs of equity and debt calculation using the CAPM model 21. Business risks and their typology with focus on: A.risk classification criteria and their categorization according to the industry of the enterprise...

What are the components of the weighted average cost of capital (WACC) and how do they...

What are the components of the weighted average cost of capital (WACC) and how do they differ for an MNE compared to a purely domestic firm? There are potential benefits and risks from raising capital on global markets. Discuss the pros and cons in terms of risk of raising capital on global markets. Briefly discuss and explain the global CAPM.

What is the weighted average cost of capital computed (WACC) and how is it computed? Discuss...

What is the weighted average cost of capital computed (WACC) and how is it computed? Discuss the two major conditions required for a company to be able to use its current weighted average cost of capital to evaluate a new project's cash flows. (maximum length guide: about 150 words)

Roston Corporation has a debt-equity ratio of 3. The company’s weighted average cost of capital (WACC)...

Roston Corporation has a debt-equity ratio of 3. The company’s weighted average cost of capital (WACC) is 11%. Its before-tax cost of debt is 13% and tax rate is 25%. The company uses Capital Asset Pricing Model (CAPM) to calculate its cost of equity. The risk-free rate of return is 5% and the market risk premium is 7%. Find out the beta of the company.

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?

evaluate Weighted Average Cost of Capital (WACC) concepts, why is WACC an important tool in the...

evaluate Weighted Average Cost of Capital (WACC) concepts, why is WACC an important tool in the evaluation of capital expenditure programs, financial structuring strategies, capital projects, equity recapitalization, dividend determination, financing working capital expansions, and evaluate WACC methods comparing other financial analysis applications used with WACC. can you also include your references.

Subjects