Question

How do privately owned firms and small businesses go about estimating their weighted average cost of capital?

Answer 1

Privately owned firms and small businesses estimate their weighted average cost of capital in very much the same way as bigger businesses.the wacc is the sum of weights x cost of capital of both debt and equity. The major difference lies in the calculation of cost of capital of debt and equity. Cost of debt is computed as the after tax cost of interest rate of loans taken by the small business.

Hence weighted average cost of capital= weight of debt× cost of debt + weight of equity x cost of equity.