WACC - F2 Flashcards
1
Q
What is WACC?
A
Weighted average cost of capital is the average cost of the entity’s finance weighted according to the proportion each element bears to the total pool of funds.
2
Q
What is the procedure to calculate WACC?
A
- Calculate weights/proportions for each source of capital based upon market values
- Estimate cost of each source of capital
- Multiply weight of each source of capital by the cost
- Sum the results
3
Q
What are the problems associated with the computation of WACC?
A
- Sources of finance to include
- Loans without market values
- Cost of capital for small entities
4
Q
How is WACC used when calculating NPV?
A
Used as a discount rate
5
Q
How does WACC help us fund our investments?
A
Helps us fund our investments as it tells us how much additional funds may cost us and is broken down into cost of debt and equity
