Weighted Average Cost of Capital

Weighted Average Cost of Capital
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Weighted Average Cost of Capital
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The weight of each fund is measured in terms of the source market value over the firm’s total market value. WACC is computed by multiplying each capital source (equity and debt) cost by the applicable market value weight and then summing the products to establish the total. The cost of equity is established using the capital asset pricing model (CAPM) (Brigham & Houston, 2021). The WACC represents the firms’ hazards and activities, and it is not always constant since it is influenced by the firm’s risk profile, the risk-free rate, and the financing strategy. The respective variables change over time, and thus they might differ for each business line. Consequently, each investment’s cost of capital should be established individually instead of collectively. This way, WACC will change due to financing choices and market volatility. The information presented shows that the WACC would remain at 10 percent for average-risk investments. On the contrary, the WACC could increase for high-risk investments and fall for low-risk projects. For high-risk enterprises, the shareholders would anticipate a higher rate of return as compensation for their higher risk appetite (Brigham & Houston, 2021). Therefore, the WACC could vary from investment to investment depending on the risk appetite.
Increased personal tax rates would affect bondholders due to the immediate taxing of their returns at a relatively higher rate. This would also prompt some investors to avoid bonds and embrace stocks, given the capital gains tax deferrals’ attractiveness (Brigham & Houston, 2021). When the company initially increases its financial leverage, the investors conceive the tax benefits as attr...