Question

What is WACC? Why market participants are interested in WACC?

What is WACC? Why market participants are interested in WACC?

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Answer #1

WACC is weighted average cost of capital. It is the calculation of weighted cost of all sources of fund (debt, equity and preference shares.
WACC = Return on Equity * (Equity/Total value)+ Return on preferred stock * (Preferred stock/Total value)+ return on Debt *( debt / Total value)*(1- tax rate) = Re* E/V) + Rp * (P/V) + Rd * (D/V)*(1-t)

Market participants are interested in WACC because if ROIC(Return on capital employed ) > WACC then the company is growing and their profits are growing. ROIC = Net Income /Capital employed. Here WACC is considered as hurdle rate. Itnvestors will not choose such stocks whose WACC > ROIC. It is also used by investors to find the instrinsic value of firm using WACC as discounting rate.

Best of Luck. God Bless

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