Question

1. What is WACC and why is it an important measure?

2. What does knowing your company's WACC allow a firm to do?

3. What are some motives and alternative instruments to source equity globally?

4. Is there optimal capital structure for multinationals?

Answer 1

Solution 1:

WACC refers to Weighted Average Cost of capital. It is also known as the cost of capital, opportunity cost or hurdle rate. WACC is calculated as:

WACC = weight of equity x cost of equity + weight of debt*cost of debt (1-tax rate).

WACC considers the entire capital structure of the company including debt and equity both (common and preference). It helps investors to determine the cost of capital a company is bearing with the financing of debt and equity. It helps investors to judge the riskiness of a company. If WACC is higher than it leads to higher beta (a measure of non-diversified risk) hence, decrease the valuation of a company. So WACC is an important measure to determine the value of a company and take investment decisions.

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