What is the relationship between WACC, ROIC and free cash flow? How would an investor use...

What is the relationship between WACC, ROIC and free cash flow? How would an investor use these to determine if a company is adding values?

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Expert Solution

Weighted average cost of capital and return on invested capital are always to be compared because weighted average cost of capital is used as hurdle rate for any project and when there will be an acceptance related criteria for any of the project, the weighted average cost of capital will be used and the company's return on invested capital must be higher than the weighted average cost of capital in order to accept the project and if the project is not returning upto the weighted average cost of capital, the project is not to be accepted.

When the weighted average cost of capital will be lower than the return on invested capital then there will be a surplus of free cash flows for the company and there will be a growth and vice versa.

investor can use these Matrix in order to derive whether the company is adding value by comparing the weighted average cost of capital with the return on invested capital because and the weighted average cost of capital will be lower than the return on invested capital it will mean that the company is adding value because the cost is lower than the return on investment and vice versa.

jeff jeffy answered 2 years ago

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