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Cost of Capital - Cost of capital WACC Cost of Capital...

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Cost of capital ( WACC) 5/15/17 Cost of Capital - Chogii Ronald 1
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o An estimate of the firm’s WACC is an attempt to quantify the average return expected by all investors in the firm. This cost is important because, if it is reduced NPV increases and more projects end up with NPV>0 o The firm’s cost of capital is the Weighted Average cost of capital where the weights are determined by the value of the various sources of capital 5/15/17 Cost of Capital - Chogii Ronald 2
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5/15/17 Cost of Capital - Chogii Ronald 3 Where WACC= Weighted Average Cost of Capital n= Sources of Capital available to the firm Ki= Component Cost of Capital Wj= Weight of j-th source or proportion of Each source in the in the pool of resources ( source’s aggregate market value in relation to the Firm’s total Value) K W i n i j WACC 1
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o In order to compute WACC one has to compute the compute the component cost of new source of capital ( Cost of debt, cost of equity, cost of preferred stock etc) and secondly establish the weights o
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