Question

Explain in detail what the weighted average cost of capital (WACC) is and the role it...

Explain in detail what the weighted average cost of capital (WACC) is and the role it plays in capital budgeting.

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Answer #1

WACC

A company do Business by raising Funds from different Investors eg Equity, Debt in return company has give Income to Fund Providers. If Company raise funds from one Source the rate is single . if Company raises funds from Different sources then company has to Find WACC to Earn Minimum return by Compant to pay Minimum return to Investors. WACC is used as rate by Investors to decide whether to Invest or Not.

Role in Capital Budgeting:

WACC is Used as discount Rate in the Caculation of NPV.NPV is used as Method of Capital Budgeting to take decision whether to accept or Reject the Project,

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