Weighted Average Cost Of Capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted.

1. Weighted Average Cost Of Capital
WACC
Ghamdan Abdulkader

2. What is 'Weighted Average Cost Of Capital
- WACC'
 Weighted Average Cost Of Capital (WACC) is a calculation of a
firm's cost of capital in which each category of capital is
proportionately weighted.
 Weighted Average Cost Of Capital (WACC) is the rate that a
company is expected to pay on average to all its security holders to
finance its assets.

3. Sources of Capital
 All sources of capital, including :
 common stock
 preferred stock
 Bonds
 any other long-term debt
are included in a WACC calculation. A firm’s WACC
increases as the beta and rate of return on equity increase,
as an increase in WACC denotes a decrease in valuation
and an increase in risk.

4. Why it Matters
 It's important for a company to know its weighted average cost of
capital as a way to gauge the expense of funding future projects. The
lower a company's WACC, the cheaper it is for a company to fund
new projects.
 A company looking to lower its WACC may decide to increase its use
of cheaper financing sources.

5. Calculate WACC
 To calculate WACC, multiply the cost of each capital
component by its proportional weight and take the sum
of the results. The method for calculating WACC can be
expressed in the following formula:

6. WCCA =
𝑬
𝑽
× 𝑹𝒆 +
𝑫
𝑽
× 𝑹𝒅 × (𝟏 − 𝑻𝒄)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D = total market value of the firm’s financing (equity and debt)
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

7. Example
 Assume newly formed Corporation ABC needs to raise ₹10,00,000 in
capital so it can buy office buildings and the equipment needed to conduct
its business. The company issues and sells 6,000 shares of stock at
₹100.Shareholders expect a return of 6% on their investment.
 Corporation ABC then sells 400 bonds for ₹1,000. The people who bought
those bonds expect a 5% return.
 Market value corporate tax rate is 35%.
 calculate Corporation ABC's weighted average cost of capital (WACC).

8. Solution
 E= 6000* ₹ 100 = ₹600,000
 D=400* ₹ 4000 = ₹ 400,000
 V= E+D = ₹ 10,00,000
 Re= Cost of equity is 6%. Because shareholders expect a return of 6% on their
investment.
 Rd = Cost of debt is 5%. The people who bought those bonds expect a 5% return
 Tc= 35%

9. WCCA =
𝟔,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
× 𝟔% +
𝟒,𝟎𝟎,𝟎𝟎𝟎
𝟏𝟎,𝟎𝟎,𝟎𝟎𝟎
× 𝟓% × (𝟏 − 𝟑𝟓%)
0.049 = 4.9%

10.  Corporation ABC's weighted average cost of capital is
4.9%.
 This means for every ₹ 1 Corporation ABC raises from
investors, it must pay its investors almost ₹ 0.05 in
return.
 For instance, Corporation ABC may issue more bonds
instead of stock because it can get the financing more
cheaply. Because this would increase the proportion of
debt to equity, and because the debt is cheaper than the
equity, the company's weighted average cost of capital
would decrease.

11. THANK YOU