What is WACC? Do you know the nature and calculation of WACC? To answer questions related to the WACC, Write Bai Xuyen Viet provides the following necessary information.
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1. What is WACC
?WACC stands for Weighted Average Cost of Capital, which means average cost of capital. In there:
WACC is the average cost of capital for each firm
The capital of the company (Capital) will include: common shares, preferred shares, bonds, long-term debt …
Cost of Capital: the required rate of return of businesses for the amount of capital spent on a project or plan.
Average cost of capital (WACC): a business’s finances include two main items of debt and equity. WACC is the average fee used to raise that amount and will be prorated.
2. What is the formula for calculating WACC
?To calculate the average cost of capital of the enterprise, which formula should be applied? People refer to the specific formula as follows:
Formula to calculate average cost of capital
WACG = E/V x Re + D/V x Rd x (1 – Tc)
Re: is the cost of equity.Rd: is the cost of debt.E: is the market value of total equity.D: is the market value of total debt.V: is the total long-term capital = E + D.Tc: is the corporate income tax. E/V: is the financial ratio based on the enterprise’s equity. D/V: is the financial ratio is based on the amount of debt of the enterprise.D/V x Rd x (1 – Tc): is the weighted value of the debt-linked capital.
Thus, it can be understood that the average cost of capital is the sum of the weighted values of equity and debt-linked capital.
3. What is the meaning of WACC
?Based on the formula for calculating WACC, businesses can know many things. Specifically, find out how much it costs the business for each dollar of funding for the business. Equity plus debt will make up the main source of capital for every business.
Calculate WACC to know how much profit each business earns
Lenders and borrowers both want to achieve mutual benefits. Calculating the average cost of capital will calculate how profitable the lender and the business side.
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From the formula for calculating WACC, it is also possible to understand the profit level of the lender and the business party. That is why business leaders often use WACC to consider economic issues before undertaking mergers or market expansion.
Based on each specific case, business leaders will know how to adjust the development direction accordingly.
4. What is the nature of WACC
? Usually businesses will finance assets through debt or equity. WACC that averages the cost of these two types of funding. How to use capital will be calculated specifically based on a certain rate. The essence of WACC is to calculate the amount of profit a company can receive when investing money elsewhere.
WACC is widely applied in many business lines
a. Using WACC for what
?WACC calculation formula is applied in many different cases.
Securities analysts use WACC to calculate the value of an investment, thereby determining whether to buy a stock.WACC is used to evaluate ROIC performance or calculate economic value added.Investors Investors will also use the WACC formula to determine whether to invest an amount. Based on the formula for calculating WACC, businesses will know the minimum acceptable profit level when investing in a certain company.
Thereby, it can be seen that investors apply the WACC formula as a practical test when calculating investment. However, for those who do not understand the WACC formula well, there may be some problems when calculating. Be careful in applying the weighted average cost of capital formula.
b. What are the limitations of WACC
?Looking at the WACC formula, many people will think that it is easy to calculate and apply. However, to give the best results, the data provider must be accurate. In particular the cost of equity, which is an inconsistent value, may be misreported from supplier to supplier. So, one of the important notes when applying WACC is choosing the most accurate data. Besides, users should also understand the nature of this formula before using it.
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Thus, the article has introduced in detail what WACC is, its meaning and its specific calculation formula. Please refer to more to know how to calculate the average cost of capital for each business.