What is wtd avg cost of capital

Question

Accepted Answer

Wtd avg cost of capital is the average cost of all the capital sources a company uses, weighted by their proportion in the company's capital structure.

WACC is used to determine the minimum rate of return a company must earn on its investments to satisfy its investors.
It takes into account the cost of debt, cost of equity, and the proportion of each in the company's capital structure.
For example, if a company has 60% of its capital structure in debt with a cost of 5% and 40% in equity with a cost of 10%, the WACC would be (0.6 x 5%) + (0.4 x 10%) = 7%.
WACC is used in capital budgeting to evaluate investment opportunities and in financial modeling to value companies.

Accepted Answer

Weight Average Cost of Capital (WACC) is the overall rate at which a firm deploys its capital which is known as the overall cost of capital (Ko). As the name suggests it is the weighted average of the cost of equity(Ke), cost of debt (Kd), and cost of preference share(Kp) ( if any) deployed by the firm. WACC is used as the hurdle rate to evaluate the project. If the project gives a return higher than the WACC the project is considered as a favorable one and vice versa.

What is wtd avg cost of capital

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