WACC Flashcards
What is WACC?
The overall cost of capital of a business
When should market values always be used?
If data is available
Why are book values bad/
They are historic and seriously understate impact of cost of equity on WACC
As book value of equity likely well below market value of equity?
It will have a lower weighting in WACC calculation leading to WACC underestimated
What happens if WACC is underestimated?
Projects may be accepted that do not delivery a high enough return to satisfy providers of finance
When can WACC only be used as cost of capital in a project evaluation
Company maintains its existing capital structure in the long-term
Project has same risk as the company
Project is small and deosn’t have a material effect on risk
When project has +NPV when discounted by WACC?
Is accepted
What is the marginal cost of capital?
There is an argument for a cost of capital to be calculated for that particular project
