Question

Critique Weighted Average Cost of Capital (WACC) concepts, why is WACC an important tool in the evaluation of capital expenditure programs, financial structuring strategies, capital projects, equity recapitalization, dividend determination, financing working capital expansions, and evaluate WACC methods comparing other financial analysis applications used with WACC.

Answer 1

Discount rate or Rate determine by CAPM might be same when the company has only equity capital. But if company has more than one type of capital that is debt, preferred stock and equity then Company should use Weightage average cost of capital that is discount rate.

A project is financed with differents et of capital that is debt, equity, preferred or might of short term debt. coast and maturity of each type of capital is different, so for evalaution of project it is important to use Weightage average cost of capital as discount.

So, overall return that a firm must make on its existing assets used as the required rate of return on any investment that has essentially the same risk as existing operation is called Weightage average cost of capital (WACC).