Simplest you can learn about WACC

Weighted Average Cost of Capital

->
Properate at which discount the cashflow associated with the project.
to
the firm's
This discount
(Marginal costof capital.
rate is or

- >

we have debt, preference equity, common equity this are the capital
componentof the firm. Any total assetwill be increase in firms
financed through atleast increase in one ofthem. The cost ofeach
of this component is called the component costof capital.

capital components and there component cost

X
--

Ipreferenced
Ittelogen
V z

less
k6 Kee
·
Rate at which in can issue new debt share
·
cost of common equity
and make of return on

eversti ngof debt.

bett Required
·

·
Yield to maturity on
common

·
Before the component cost stockand generally difficult the

->
Because we are interested in after tale cost of capital we adjust the costof
webt. A for the firms marginal tare rate, to
time consitura project thatrequires expenditures, the return
Any
->

comparing
we

Concept
onthese repentines tomefee isappropriatewayoffarinthe the

meets 100,000 how project

company
Formula 8-
ebt
* Equity
$30,000 30%
= $7010002 70%

(wal(ko (1-t1] (Wps((kps) (Woe (kcel

There is a

cost investthe WAC +

+
of =

in the business.

combiningat
By the
where, ->
INACC
computingstructure:
-

of debt the capital structure.

com,
target cap
was % in tousobettanteStanares
was % of preferenced stock in the capital structure.
94
=>

=
waca=
K61(-gnaltarholde
=(0,ns)(0,015) (0.6) (0.6) + 10,10)(0,09) +
+

structure
10.45) (0,1151

to stock in the capital

=0.081

Week of common =8. 1%

 * After have cost of debt, K6ll-t
Is used in
computing the WACC. This the interest rate at which firm can issue

new debt (K6). Net ofthe fare saving from the face defuctibility of interest, 196(H)
of debt Interest rate fave
After tare cost
saving
interest rate of 7.5%.
-
-
new felt at
planning to
com. is issue

of
has
com marginal 40% rate, whati s com, cost the te

K6
= -

Kolt -48 of
->

4.5%
eref
=>

=k6(1 t -

fruttrabtinpublic thenerstingingleft maturityantirstingjanbetaketovaluee n

->

bants.
-x -

A cost of Preferret stock /kpa) is : ere I canhasproffered atalkthat waysanene

share. What is the cam, cost of preffered stock?

dividents
kps=Dps/P

Preferred
- >

$0.50/$100
where, Dis
=> 0.083
=
=
0.5%

kps=Mps/P
=

P =
Market price of proffered,
I
misformula is
rearrangement of P
Dps//ps,
=

-
where pavalue
X-
of stock.

* costof Equity capital (Kcel

required rate of return firms on the common stock.

equity be estimate ofthe following approaches:

common
busing
can one

cantal
Assetpricing ou

10
Step of 8 -

Estimate RF (Risk FreeRatel

Stepoz-Estimate Beta. (stock misk measured
Step 3:Estimate the expected rate of return, Elmkt
↳ this evaluate estimate the required rate of return
using eref
Suppose RF =
5%, Rmit=11% and sam, has a beta of 1.1. estimate

kce RF+ B (E)RmKtY -RF]

cost of equity?
=
RRIBTE(RmKH REJ
->
kce= -

Sto+1.1 (11% -5%)

=>

11.6%
=

where, E(Rinkt)= Expected Return on Market - calculation -

Risk Free Rale+Betax Market Risk Premium

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02. Bond Yield Plus Risk Premium approach -

market yield the firm's

long term debt.
Add a risk premium to the on

erineinterestratewillngtamdebt statethe
Ice=BanbVielb+ Risk Premium
ketbondyield wisk Premiere
->
e