Why weighted average cost of capital WACC should be used as-02009
This subjective question is related to the book/course
vu mgt502 Organizational Behaviour.
It can also be found in
vu mgt502 Mid Term Solved Past Paper No. 1.
The WACC is the minimum return that a company must earn on an existing asset base tosatisfy its creditors, owners, and other providers of capital, or they will invest elsewhereBroadly speaking, a company's assets are financed by either debt or equity. WACC is theaverage of the costs of these sources of financing, each of which is weighted by itsrespective use in the given situation. By taking a weighted average, we can see how muchinterest the company has to pay for every dollar it finances.
A firm's WACC is the overall required return on the firm as a whole and, as such, it isoften used internally by company directors to determine the economic feasibility of aproject . It is the appropriate discount rate to use for cash flows with risk that is similar tothat of the overall firm.
