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