Question

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

Answer 1

WACC = Cost of equity x Weight of equity + Cost of preferred share x Weight of preferred share + Cost of Debt (after tax) x Weight of debt

WACC is weighted average cost of the capital of the firm at overall level. If firm knows its overall cost of capital then firm can make decision to accept the project or reject the project. Firms can look for projects which are yielding more than the stated WACC of the firm. Project with higher rate of return or more than WACC are generally accepted by the firm.

Knowing WACC helps firm to make quicker decision based on facts of the coming project. However, the WACC doesn’t remain static hence firm should consider the different scenarios under which WACC can be revised but for revising WACC firm should know the present WACC hence in all kind of the analysis WACC is must be known factor for the firm.