Risk/Return Relationship And Cost Of Capital

Risk/Returns Relationship and Cost of Capital
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Risk/Returns Relationship and Cost of Capital
Primarily, there is a need to understand the two concepts of Target Weights and Historical Weights. Target Weights are market value or book weights obtained through capital structure proportions (Ortiz, 2021). On the other hand, Historical Weights are also market value or book weights whose foundation is the propositions of actual capital structure.
The Weighted Average Cost of Capital (WACC) provides the criterion for a company to establish all the campaniles capital sources, which range from long-term debt, bonds to stocks (Ortiz, 2021). The WACC formulation was based on the concept that an increase in capital results in a corresponding increase in the risk. Equally, when the capital invested reduces, the risk is also relatively low (Ortiz, 2021). In my understanding, I can use an analogy of the funnel to explain the logic applied in using Target Weights in calculating the WACC. When the funnel remains full sustainably, it symbolizes a healthy business organization whereby ...