FIN 370 Week 4 Assignment, WACC and Corporate Investment Decisions
One such financial method is the WACC Method. The weighted average cost of capital is the “weighted average of the cost of equity and the after tax cost of debt. This is the overall return the firm must earn on its existing assets to maintain the value of its stock. It is also the required return on any investments by the firm that have essentially the same risks as existing operations”. It is used to provide a discount rate for a financed project as the cost of financing the capital is a logical price to put on the investment. In simple terms the formula to calculate WACC involves the following.
(Percentage of finance that is equity x Cost of Equity) + (Percentage of finance that is debt x Cost of Debt) x (1 – Tax Rate).