Also known as WACC (Weighted Average Cost of Capital), it is a discount rate that measures the average cost that our operating assets have had, based on the way they have been financed, either through own capital (Equity) or third party resources (Debt). It is expressed as an annual rate, it takes into account the entire capital structure (liabilities plus equity) of the company, and involves the pertinent adjustments in accordance with current tax rates.
It is understood as the minimum rate of return required by the company for its investments and is commonly used in the valuation of companies, to discount the future cash flows generated by the firm. By discounting (bringing future cash flows to present value) with the WACC, one can be able to demonstrate whether a project or investment is profitable, that is, whether the project will give returns that offset the investments made.
In accordance with what was stated by (Mascareñas, 2001), the WACC represents the minimum rate of return at which it must remunerate the various financial sources that make up its liabilities, in order to keep its investors satisfied, avoiding, in parallel, the decrease in value. market share.
WACC EQUATION
WACC equation
The company ABC has to date liabilities of $ 60 million and equity of $ 40 million. The minimum rate of return required by investors is 14% and the bank interest rate is 12%. If the income tax rate is 33%, what is the weighted average cost of capital?
Example Weighted Average Capital Cost
Example No. 2:
The company ABC is planning to carry out the construction of a new production plant that will cost $ 60 million and is expected to produce income of $ 12 million a year for six years. If the company's WACC is 10.42%, it should lead to Did you build the new production plant? Do an analysis and explain your results.
WEIGHTED AVERAGE CAPITAL COST “CCPP O WACC”
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