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    The Weighted Average Cost of Capital (WACC)

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    What is the weighted average cost of capital (WACC)?

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    Thanks for your question! This should give you some good background to answer your question!

    To understand the Weighted Average Cost of Capital, we must first define the term. New York University gives the following definition:
    "Cost of capital" is defined as "the opportunity cost of all capital invested in an enterprise."

    Let's dissect this definition:
    Opportunity cost is what you give up as a consequence of your decision to use a scarce resource
    in a particular way.

    All capital invested is the total amount of cash invested into a business.
    In an enterprise this refers to the fact that we are measuring the opportunity cost of all sources of capital which include debt and equity.

    Source: http://pages.stern.nyu.edu/~igiddy/articles/wacc_tutorial.pdf

    In the simplest definition, capital is the money and resources required to run a business. Some examples of this would be using cash to buy a new piece of equipment, taking out a bank loan to purchase an office building, or issuing bonds to raise money a new project. There are different costs associated with each type of transaction that the company could use to make money.

    When a company uses cash it already has on hand ...

    Solution Summary

    This solution of 764 words defines the weighted average cost of capital (WACC) and describes its characteristics and uses in an organization.