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1. FINANCIAL MANAGEMNT
Weighted Average cost of
capital
CHAITANYA PHARTALE GMB202204044
BAHAAR DHALL GMB202204044
MANSI PATIL GMB202204044
MADHUKESH MAROL GMB202204044
RANJAN SENAPATI GMB202204044

2. Cost of Capital
 The concept of the cost of capital is key information used to determine a
project's hurdle rate.
 A company embarking on a major project must know how much money the project will
have to generate in order to offset the cost of undertaking it and then continue to
generate profits for the company.
 Cost of capital, from the perspective of an investor, is an assessment of the return that
can be expected from the acquisition of stock shares or any other investment.
 This is an estimate and might include best- and worst-case scenarios.
 An investor might look at the volatility (beta) of a company's financial results to
determine whether a stock's cost is justified by its potential return.

3. Weighted Average Cost Of Capital
 The weighted average cost of capital (WACC) represents a firm's average after-tax cost of capital from all sources, including
common stock, preferred stock, bonds, and other forms of debt. WACC is the average rate a company expects to pay to
finance its assets.
 The weighted average cost of capital is a common way to determine required rate of return because it expresses, in a single
number, the return that both bondholders and shareholders demand in order to provide the company with capital. A firm’s
WACC is likely to be higher if its stock is relatively volatile or if its debt is seen as risky because investors will require
greater returns.
 What is the WACC Formula?
 As shown below, the WACC formula is:
 WACC = (E/V x Re) + ((D/V x Rd) x (1 – T))
 Where:
 E = market value of the firm’s equity (market cap)
D = market value of the firm’s debt
V = total value of capital (equity plus debt)
E/V = percentage of capital that is equity
D/V = percentage of capital that is debt
Re = cost of equity (required rate of return)
Rd = cost of debt (yield to maturity on existing debt)
T = tax rate

4. Example OF WAAC
 As an example, consider a hypothetical manufacturer called XYZ Brands. Suppose the book value and market
value of the company’s debt are $1,000,000, and its market capitalization (or the market value of its equity) is
$4,000,000.
 Let’s further assume that XYZ’s cost of equity—the minimum return that shareholders demand—is 10%. Here,
E/V would equal 0.8 ($4,000,000 of equity value divided by $5,000,000 of total financing). Therefore, the
weighted cost of equity would be .08 (0.8 x .10). This is the first half of the WACC equation.
 Now we have to figure out XYZ’s weighted cost of debt. To do this, we need to determine D/V; in this case,
that’s 0.2 ($1,000,000 in debt, divided by $5,000,000 in total capital). Next, we would multiply that figure by
the company’s cost of debt, which we’ll say is 5%. Last, we multiply the product of those two numbers by 1
minus the tax rate. So if the tax rate is 0.25, “1 minus Tc” is equal to 0.75.
 In the end, we arrive at a weighted cost of debt of .0075 (0.2 x .05 x 0.75). When that’s added to the weighted
cost of equity (.08), we get a WACC of .0875, or 8.75% (0.08 weighted cost of equity + 0.0075 weighted cost
of debt).
 That represents XYZ’s average cost to attract investors and the return that they’re going to expect, given the
company’s financial strength and risk compared with other opportunities.

5. THANK YOU