WACC calculations??



0
significance of calculating WACC

3 Answer(s)


0

WACC, or Weighted Average Cost of Capital, is a financial metric used to measure the cost of capital to a firm. It is most usually used to provide a discount rate for a financed project, because the cost of financing the capital is a fairly logical price tag to put on the investment. WACC is used to determine the discount rate used in a DCF valuation model.

The two main sources a company has to raise money are equity and debt. WACC is the average of the costs of these two sources of finance, and gives each one the appropriate weighting.

Using a weighted average cost of capital allows the firm to calculate the exact cost of financing any project

0

WACC, or Weighted Average Cost of Capital, is a financial metric used to measure the cost of capital to a firm. It is most usually used to provide a discount rate for a financed project, because the cost of financing the capital is a fairly logical price tag to put on the investment. WACC is used to determine the discount rate used in a DCF valuation model.

The two main sources a company has to raise money are equity and debt. WACC is the average of the costs of these two sources of finance, and gives each one the appropriate weighting.

Using a weighted average cost of capital allows the firm to calculate the exact cost of financing any project

0

Each company has 3 source of finance (Equity, Debt & Retained Earnings) and would use them in different proportions depending on various factors (stage of their life cycle, Market share, Free cash flow etc...). Also each of these sources of finance have a different cost attached to them and significantly affect the bottom line & viability of the company.

Hence a WACC is calculated to arrive at the total cost of finance for a company to make it comparable to other companies within the same industry and gauge how efficiently the company is being managed/operated.