Weighted average cost of capital


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Weighted average cost of capital (WACC)

Expected return on a portfolio of all a firm's securities. Used as a hurdle rate for capital investment. Often the weighted average of the cost of equity and the cost of debt The weights are determined by the relative proportions of equity and debt in a firm's capital structure.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
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The appropriate discount rate is the weighted average cost of capital for the firm (WACC) derived from the market-weighted average of the firm's after-tax debt and equity costs.
Impact of ERM on Weighted Average Cost of Capital (WACC)
* In this model, the weighted average cost of capital is averaged between the various sources of capital utilised by a business.
Keywords: investment decisions, modified internal rate of return, weighted average cost of capital
"This is a substantial improvement on the 6.1 per cent ROIC expected to be achieved in 2014.This is still 0.8 percentage points below the 7.8 per cent weighted average cost of capital (WACC), so there is still some ground to cover before achieving sustainable margins."
The assessment is based on a discounted cash flow (DCF) model with a nine-year average weighted average cost of capital (WACC) of 9.9pc, a terminal growth rate of 2pc and a terminal enterprise value versus earnings before interest, taxes, depreciation and amortisation ratio (EV/EBITDA) multiple of 4x.
The assessment is based on a discounted cash flow (DCF) model with a nine-year average weighted average cost of capital (WACC) of 9.9 per cent, a terminal growth rate of two per cent and a terminal enterprise value versus earnings before interest, taxes, depreciation and amortisation ratio (EV/EBITDA) multiple of 4x.
This included the weighted average cost of capital (WACC) for the industry, which will be used from 2015 onwards.
its weighted average cost of capital? Finance researchers have developed a number of theories in this regard; unfortunately there is no consensus among them.
The report stresses the need to develop local Capital Market for PPP projects to ease the financing burden substantially by considerably lowering the WACC (Weighted Average Cost of Capital).
On Monday, the Association for Financial Professionals issued its "2013 AFP Estimating and Applying Cost of Capital Survey Report." The survey of 424 finance professionals found that although financial planning and analysis (FP&A) might be the department that makes the most use of weighted average cost of capital (WACC) figures, it is generally not the department responsible for coming up with WACC estimates.
Initially, the weighted average cost of capital drops with leverage as the increase in the required return on equity does not entirely offset the cheaper debt financing and consequently, the weighted average cost of capital falls with restrained use of leverage.3 However if the use of debt continues to accelerate, then after some time the increase in the required return on equity is more than what is offset by the use of cheaper debt financing in the capital structure.

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