Question no.

1: We base our investment decisions on WACC even if

we are borrowing funds using debt. Please comment.
Wacc:
The weighted average cost of capital (WACC) is a calculation that allows
firms to understand the overall costs of acquiring financing. Company basic
sources of funding includes debt, preferred stock, common stock and retained
earnings. Investors demand the long term Debt that is cheaper due to tax relief
on interest payment and simple to calculate as it is in the terms of bonds and
loans and it has lowest rate of reurn. Equity is a bit more complex which
includes stocks. After debt option , investors trying to invest in preffered sock
then in retained earning and in lsst in the common stock which has the higest
rishk and has high rate of return. Applying the WACC to the estimated rate of
return for new projects and it is a simple way to determine if a project is
sufficiently profitable to offset the cost of financing. investors use WACC as a
tool to decide whether to invest. The WACC represents the minimum rate of
return at which a company produces value for its investors. For example: in
textile sector, wacc is used by company to form capital structure by
combination or mix of debt and equity. Most textles company used the 80%
debt and 205 equity combination. Another e.g is WACC is a useful calculation,
as it shows management what the cost of borrowing capital is overall. This
overall cost of capital can then be a minimum required return on any new
operation. For example, if it will cost 8% in capital costs to fund a project that
creates 10% in profit, the organization can confidently borrow capital to fund
this project. If the project would only turn 8% profit, the firm would have a
difficult decision. If the project would turn 6% profit, it is quite easy to
strategically argue against the new project. Securities analysts employ WACC
when valuing and selecting investments. For instance, in discounted cash
flow analysis, WACC is used as the discount rate applied to future cash
flows for deriving a business's net present value. WACC can be used as a hurdle
rate against which to assess ROIC performance. It also plays a key role
in economic value added (EVA) calculations.
Investors use WACC as a tool to decide whether to invest. The WACC
represents the minimum rate of return at which a company produces value for
its investors. Let's say a company produces a return of 20% and has a WACC of
11%. For every $1 the company invests into capital, the company is creating
$0.09 of value. By contrast, if the company's return is less than its WACC, the
company is shedding value, indicating that it's an unfavorable investment.
WACC serves as a useful reality check for investors. To be blunt, the average
investor probably wouldn't go to the trouble of calculating WACC because it
requires a lot of detailed company information. Nonetheless, it helps investors
understand the meaning of WACC when they see it in brokerage analysts'
reports.