What are weighted average cost of capital?
Dear average cost of capital is the amount that the company pays for its capital on average on the basis of all its funding sources. Capital may come from shares, bonds or debts. Each of these sources has costs. Calculation of weighted average capital costs (WACC) reflects the cost of each type of capital in proportion.
How much does the company have to pay to finance its business is reflected at weighted average costs. It shows how much return on investment the company must obtain to finance its debt and its own capital. If the Company plans to expand or launch a new project or is considering a merger or acquisition, it will look at the planned return and compare it to the valuable average capital costs to see if the plan is feasible.
Average weighted capital costs can be used to generally assess the risk of the company or a specific project or enterprise. Higher average cost per capital is a higher risk, simply becauseE Project must return more money to equalize. Two or more options can be compared by comparing weighted average capital costs for different options.
In order to calculate weighted average cost of capital, several factors must be known. The number of different types of capital, such as stocks, bonds, debt and other obligations; When calculating weighted average average capital costs, the required return on each type and the market value of each of the types of securities is considered. For large companies with many capital sources, this calculation can be quite complex. Some of the required information can be found on the company's financial statements, but other factors will have to be examined, such as the market value of securities.
In addition to providing information about a specific company or project, weighted average Capital costs can be calculated for the industry as a whole. By comparing pThe investor may determine the level of risk that the company has or will be created by the implementation of a new project. WACC for a new project or merger may differ from the existing WACC company if the project or merger is considered more or less risky than the current position of the company.