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Weighted Average Cost of Capital - Material Cost, Cost Accounting Video Lecture | Cost Accounting - B Com
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FAQs on Weighted Average Cost of Capital - Material Cost, Cost Accounting Video Lecture - Cost Accounting - B Com
| 1. What is the formula for calculating Weighted Average Cost of Capital (WACC)? |  |
Answer: The formula for calculating WACC is WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc), where E is the market value of equity, V is the total market value of equity and debt, Re is the cost of equity, D is the market value of debt, Rd is the cost of debt, and Tc is the corporate tax rate.
| 2. How is the cost of equity calculated in the Weighted Average Cost of Capital (WACC) calculation? | |
Answer: The cost of equity is calculated using the Capital Asset Pricing Model (CAPM), which considers the risk-free rate, the equity market risk premium, and the beta of the company's stock. The formula for cost of equity is Re = Rf + β * (Rm - Rf), where Rf is the risk-free rate, β is the beta of the stock, Rm is the expected market return, and Rf is the risk-free rate.
| 3. What factors are considered when determining the cost of debt in the Weighted Average Cost of Capital (WACC) calculation? | |
Answer: The cost of debt takes into account factors such as the interest rate on current debt, the credit rating of the company, and the market interest rates. The cost of debt is typically calculated as the yield to maturity on bonds or the interest rate on current debt.
| 4. How does the Weighted Average Cost of Capital (WACC) impact a company's investment decisions? | |
Answer: The WACC is used as a discount rate to evaluate the feasibility of investment projects. If the expected return on an investment is higher than the WACC, it suggests that the project will generate a return greater than the cost of capital and may be worth pursuing. Conversely, if the expected return is lower than the WACC, it indicates that the project may not be financially viable.
| 5. How can a company lower its Weighted Average Cost of Capital (WACC)? | |
Answer: A company can lower its WACC by taking steps such as reducing its cost of debt through refinancing at lower interest rates, improving its credit rating, and optimizing its capital structure. Additionally, decreasing the cost of equity can be achieved by improving the company's financial performance and reducing perceived risk, which can lead to a lower beta and a lower required rate of return for investors.
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