Companies may have a variety of funding methods.
For example,a company may have 10,000 £1 shares in issue,currently trading at £2.00.This gives it an equity value of £20,000.The shareholders have an expected return of 20% i.e.for the £2 share they would expect a dividend of 40p
It also has a £5,000 loan at a rate of 10% interest (after tax).This gives it a debt value of £5,000.
The Weighted Average Cost of Capital is:

Question

Quizplus · Accepted Answer

WACC is calculated by comparing the different rates and proportions of funds. In the example above, 80% of the company is equity, at a cost of 20% and 20% of the company is debt, at a cost of 10%.So the WACC is 18%.When a company takes on a significant investment, the funding method should be considered. In the example, if the project requires a £10,000 loan which may cost only 5% rather than the current 10% rate, then there is a new capital structure and a new WACC calculation.

Companies May Have a Variety of Funding Methods