Question

When we calculate WACC, do we consider such current liabilities as accounts payable, accruals, and deferred...

When we calculate WACC, do we consider such current liabilities as accounts payable, accruals, and deferred taxes as sources of funding? Why?

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Answer #1

Answer :-

WACC is termed as Weighted Average Cost of Capital . It is a average rate which a business pays to finance is assets .  We do not consider such current liabilities as accounts payable, accruals, and deferred taxes as sources of funding while calculating WACC as we only consider only Cost of Equity , Cost of Preference Shares and Cost of Long term debt . We take all this cost after tax . So it is a Weighted Average after tax Cost of Capital. We don't current liabilities as accounts payable, accruals, and deferred taxes because there are the par of operating liabilities not of capital employed and we need to take only of cost of capital employed in WACC.

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