Question

HOW TO CALCULATE COST OF INVESTMENT. WHETHER PURCHASES R ADDED IN CALCULATING COI. PLS CLARIFY

TNX

Answer 1

Answer:

The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All sources of capital, including common stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation.

A firm’s WACC increases as the beta and rate of return on equity increase because an increase in WACC denotes a decrease in valuation and an increase in risk.

KEY TAKEAWAYS

Calculation of a firm's cost of capital in which each category of capital is proportionately weighted.

Incorporates all sources of a company’s capital—including common stock, preferred stock, bonds, and any other long-term debt.

Can be used as a hurdle rate against which companies and investors can gauge ROIC performance.

WACC is commonly used as the discount rate for future cash flows in DCF analyses.