Explain the term Weighted Average Cost of Capital (WACC) and state the procedure on how it is calculated

      

Explain the term Weighted Average Cost of Capital (WACC) and state the procedure on how it is calculated.

  

Answers


Ruth
The weighted average cost of capital (WACC) is a calculation of a firm's returns on an investment in a company. It is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight by market value, and then adding the products together to determine the total.

Procedure for calculation of the WACC
Compute the components cost or the costs of the specific sources of funds
i) Determine the proportion or weight of each capital component in the capital structure.
This is done by dividing the amounts of funds raised from each source by the total of the
long term funds.
ii) Multiply the weight of each capital component by its cost. This gives a weighted
component cost.
iii) All the weighted component costs are added together. Their total is the firms weighted
average cost of capital.

NatalieR answered the question on February 9, 2022 at 12:48


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