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Weighted Average Cost Of Capital and Adjusted Present Value

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In what situations should the WACC and the APV be used? How do personal taxes affect the use of these two methods?

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The weighted average cost of capital and adjusted present values are examined.

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The WACC is the weighted average cost of capital used to measure the expected pay on average to all its security holders to finance its assets. According to Investopedia (2012):

Broadly speaking, a company's assets are financed by either debt or equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances. A firm's WACC is the overall required return on the firm as a whole and, as such, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. It is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm. (Investopedia, 2012)

This means the WACC should be used ...

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Keonda Grant-Taylor, MBA
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  • MBA, Webster Univeristy
  • Dual BS Degrees, University of South Carolina
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