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Homework answers / question archive / What is the WACC and why is it important to estimate a firm's cost of capital?
What is the WACC and why is it important to estimate a firm's cost of capital?
WACC :
WACC stands for The weighted average cost of capital. It is simply the cost of the individual sources of capital. Capital is almost usually comprised of the equity that shareholders decided to in a company, or the debt that the lenders decided to invest in a company, with each source being individually being proportionally weighted.The cost of capital is the rate of return required by a capital provider in exchange for foregoing an investment in another project or business with similar risk.
Importance :
In calculating the WACC the shareholders or lenders would be able to estimate the return that they would be able to earn when they decide to the invest in this company. WACC is the minimum return required by capital providers,So, managers should invest only in projects that generate returns in excess of WACC.