DQ4B - Equity will typically refer to the cost of common...

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What is meant by Weighted Average Cost of Capital (WACC)? The weighted average cost of capital (WACC) is a basic financial formula to determine the required rate of return. WACC takes the total cost of debt and equity proportional to total value. The formula looks like this. What are the components of WACC? (Equity/Value * cost of equity) + (Debt/Value * cost of debt) Why is WACC a more appropriate discount rate when doing capital budgeting?
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Unformatted text preview: Equity will typically refer to the cost of common stock, while debt is the cost of bonds and preferred stock. What is the impact on WACC when an organization needs to raise long term capital? WACC is a useful rate because it incorporates both the cost of equity and the cost of debt into the formula. Typical capital budgeting projects will require both, so WACC provides a more accurate analysis of the cost of the project....
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