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Weighted Average Cost of Capital (WACC)

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What is meant by Weighted Average Cost of Capital (WACC)?
What are the components of WACC?
Why is WACC a more appropriate discount rate when doing capital budgeting?
What is the impact on WACC when an organization needs to raise long term capital?

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Solution Summary

The solution has detailed explanation of the WCC and its components. A analysis of the use of WACC as the appropriate discount rate along with its impact on raising long term capital is presented.

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The Weighted Average Cost of Capital is the average of the current costs of the sources of finance employed by a company (Samuels et al, 2000). The WACC is computed as (Cost of Equity x Proportion of equity from capital) + (Cost of debt x Proportion of debt from capital) + (Cost of Preference Stock * Proportion of Preference Stock).

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