FIN 325 - proportion and costs of debt and equity...

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Why is WACC important to an organization? Weighted Average Cost of Capital (WACC) is important because an organization uses this information to evaluate investment decisions. WACC is the anticipated rate of return on a portfolio of all the organization’s securities, adjusted for tax savings due to interest payments (Brealey, Marcus, & Myers, 2007, p. 327). If an organization has a WACC of 10% then an organization should only make investments that will give them a return higher than the WACC which in this example is 10% for the investment to be practical. Costs of capital are a type of opportunity cost (12 Manage). WACC is the required rate of return that organizations should make to preserve or increase the value of their current stock. If a company takes a large amount of debt to lower their WACC a threat of bankruptcy can occur. WACC considers the relative
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Unformatted text preview: proportion and costs of debt and equity components to give the overall cost of capital for a firm (University of Phoenix, 2009). The right mix of debt and equity that a company maintains depends on the organization. WACC is an important tool to organizations. References 12 Manage. (2008). Analyzing the cost of invested capital. Explanation of WACC. Retrieved January 16, 2009, from Brealey, R. A., Marcus, A. J., & Myers, S. C. (2007). Fundamentals of Corporate Finance . (5 th ed.). New York: The McGraw-Hill Companies. University of Phoenix. (2009). Determining the Debt-Equity Mix [Computer software]. Retrieved January 16, 2009, from University of Phoenix, Resource, Simulation, FIN325 Financial Analysis for Mangers II Course Web site:
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This note was uploaded on 09/06/2011 for the course FIN n/a taught by Professor N/a during the Spring '06 term at University of Phoenix.

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