Corporate Finance Basics
Why
Calculate Weighted Average Cost of Capital?
The weighted average cost of capital is a way
to calculate the
required rate of return on an entire firm. It incorporates debt,
equity, and preferred shares of stock into this required rate. These are
the various ways that a firm can raise capital. It is important to
incorporate this fact into the rate because firms do not raise all of
their capital from one source. They often gather it from a combination of
all of these sources. Each method of raising capital has a different cost
associated with it, and must be taken into account.
This rate of return that the WACC finds can then be used in different
models, such as the
NPV model to value, for example, whether or not a company should be
started.
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