Why WACC in important? How to consider defining WACC for startup firm that no debt and...

Why WACC in important? How to consider defining WACC for startup firm that no debt and capital funds from partners?

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Expert Solution

Weighted average cost of capital is the cost of capital for various projects have been undertaken by the firm and it is used as a hurdle rate in order of selection of various projects and finding out the expected rate of return. It is a combination of ocost of equity and the cost of debt along with their weights adjusted with interest and tax.

weighted average cost of capital is important because it is used for decision making under various situations like investment decision making and it is also used the hurdle rate for selection of various projects and undertaking them through determination of acceptability criteria.

weighted average cost for a startup firm that does not have any debt capital and it has capital funds from partners will be mostly concentrated on the cost of equity because it does not have the debt capital and the cost of equity will be treated as cost of capital and cost of retained earnings can be used simultaneously.

There would be an use of adjustment of unlevered beta in order to find the expected rate of return using this cost of capital.

jeff jeffy answered 1 year ago

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