The Weighted Average Cost of Capital (WACC)
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What is the weighted average cost of capital (WACC)?
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This solution of 764 words defines the weighted average cost of capital (WACC) and describes its characteristics and uses in an organization.
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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 ...
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