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Example Calculations of WACC | Numericals

An example calculation of WACC(Weighted Average Cost of Capital)

Here's a numerical example of WACC calculation:

Let's say a company has the following capital structure:

  • Equity: $100,000 (market value)

  • Debt: $50,000 (market value)

  • Cost of Equity: 12%

  • Cost of Debt: 8%

  • Corporate Tax Rate: 30%

First, we need to calculate the weights of debt and equity:

  • Weight of Debt: 50,000 / (50,000 + 100,000) = 0.3333

  • Weight of Equity: 100,000 / (50,000 + 100,000) = 0.6667

Next, we can use the WACC formula to calculate the weighted average cost of capital:

WACC = (0.3333 x 8% x (1 - 30%)) + (0.6667 x 12%) = 10.22%

Therefore, the company needs to earn at least 10.22% on its investments to satisfy its investors and creditors. This WACC can be used as a discount rate for evaluating investment projects and capital budgeting decisions.

WACC meaning in Finance (Weighted Average Cost of Capital)

WACC (Weighted Average Cost of Capital) is a financial term that represents the minimum rate of return a company must earn on its investments to satisfy its investors and creditors.

When a company needs to raise money to fund its projects, it can do so by either borrowing money (debt) or selling ownership in the company (equity). Both debt and equity come with a cost, which is why a company must earn a certain return on its investments to pay back its investors and creditors.

WACC takes into account both the cost of debt and equity, as well as the proportions in which they are used to finance the company. The formula for WACC considers the cost of each type of capital and multiplies it by the proportion of the total capital structure that it represents.

The resulting WACC percentage is the minimum rate of return that the company needs to earn on its investments to satisfy its investors and creditors. If a project is expected to earn less than the WACC, it may not be worth pursuing because it won't generate enough return to satisfy the investors and creditors.

In summary, WACC is a measure of a company's cost of capital, and it helps the company make decisions about which investment projects are worth pursuing.


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