Question

1. What is the WACC and how is it calculated? Are there any other names a company might use for metrics used by the company and based on the WACC? In what calculations/analyses might a company use the WACC? How are the cost of debt and cost of equity calculated? Include in your discussion taxes, RATE, and CAPM.

Could you please answer question as a short essay 4-6 sentences

Answer 1

Wacc is called weighted average cost of capital and it calculated by calculating weighted average of cost of all source of funding like equity debt and preferred stock. It is also called as hurdle rate

Wacc is used in npv calculation and taking decisions regarding to taking projects

If project return is below wacc we should not accept that project because it will result in negitive present value

Calculation of cost of debt

In wacc we should take after tax cost of debt

= Kd(1-t)

Where kd is before tax cost of debt

t is rate of tax

For preferred stock

Cost is dividend/market value (in case of irredeemable)

In case of redeemable calculation is same as debt but no tax sheild will be available

In case of equity cost is risk free rate plus beta times market risk premium according to capm