WACC


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WACC

Weighted Average Cost of Capital

A calculation of a company's cost of capital in which every source of capital is weighted in proportion to how much capital it contributes to the company. For example, if 75% of a company's capital comes from stock and 25% comes from debt, measuring the cost of capital weights these accordingly. A high WACC indicates that a company is spending a comparatively large amount of money in order to raise capital, which means that the company may be risky. On the other hand, a low WACC indicates that the company acquires capital cheaply.
References in periodicals archive ?
The value $113 million is calculated by grossing up WACC by the marginal tax rate.
For instance, at the end of stage 2, the project should be expected to achieve a return of at least 20 percent above WACC, whereas this figure will have fallen to 10 percent at the completion of construction and prior to commissioning.
In contrast, when using the FCF method, the after-tax WACC has to be re-estimated every period.
However, being familiar with the standard model, they focus on ROE and WACC.
For example, assuming a nominal cost of unlevered equity of 15%, a capital structure comprised of 30% debt and 70% equity, and a marginal income tax rate of 40%, the nominal WACC discount rate would be calculated as 15% x [1 -(40% x 30%)] = 13.
There is considerable room for questioning the magnitude of capital constraints generated by MARR or WACC discount rates because they are independent of the relative scales of investment and borrowing opportunities.
Under an MWACC approach, all payments relating to items considered liabilities for tax purposes are removed from the cash flow model at their net present value (as estimated by a professional appraiser) and are deemed to be liabilities similar to interest-bearing debt in the WACC approach.
Sample WACC comparisons may be subject to error because the cost of capital measures may not be applied to appropriate definitions of operating cash flows whose qualities, time-growth patterns, and risk may differ.
While WACC is widely reviewed across corporate finance departments, it is generally seen as an imperfect measure of a firm's cost of capital.
Rex Bionics is trading at a significant discount to its peers on EV/sales and a reverse DCF with 15% WACC and 3% terminal growth implies that annual sales need to grow to only 207 units by 2020 to justify the current share price.