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Weighted Average Cost of Capital (WACC) and the factors that

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Discuss the Weighted Average Cost of Capital (WACC) and the factors that affect it.

Why is the emphasis on cash flow instead of net income in capital budgeting?

How does capital budgeting relate to WACC?

Finally, discuss risk analysis in capital budgeting and how you should address it in making a decision (as a manager).

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Your tutorial is 564 words and two references. An example of capital budgeting is given.

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Discuss the Weighted Average Cost of Capital (WACC) and the factors that affect it.

WACC is a blending of the after-tax cost of loans and the cost of equity financing to figure out the cost of obtaining assets for the business. The factors that impact it are the cost of borrowing for new loans, tax rates, and the market returns on equity of similar risk. WACC moves slowing in response to changes in debt when debt carries fixed interest rates because the rates of interest stay the same over the maturity period of the loan. WACC typically adjusts each year for changes in market returns on similar equities. The ratio of debt to stock will influence WACC as the proportion of interest bearing changes. That is, debt is generally cheaper than equity financing so when firms take on new debt the WACC can come down to reflect larger portion of assets from debt versus equity. Tax rates are a function of legislative action and not ...

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Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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