WEIGHTED AVERAGE COST OF CAPITAL (WACC).pptx

weighted average cost of caoital

1. WEIGHTED AVERAGE COST OF CAPITAL (WACC) (OVERALL COST OF CAPITAL - KO) Presented By Vikash Barnwal

2. Meaning: Weighted average cost is the average of the costs of specific sources of capital employed in a business, properly weighted by the proportion they hold in the firm's capital structure. According to ICMA London:" Weighted average cost of capital is the average cost of company's finance weighted according to the proportion each element bears to the total pool of capital, weighing is usually based on market valuations current yield and costs after tax."

3. COMPUTATION OF WEIGHTED AVERAGE COST The concept of weighted average cost is simple and requires the following steps: 1. Computation of weights (proportions) to be assigned to each type of funds. 2. Assignment of costs of various sources of capital. 3. Adding of the weighted cost of all sources of funds to get an overall weighted average cost of capital.

4. BOOK VALUE & MARKET VALUE Book Value: Value shown in the balance sheet is called book value. Weightage to each source of finance is given on the basis of book value as recorded in the balance sheet. Market Value: Market value represent prices of prevailing in the stock market for securities. So current market price are applied in ascertaining the weightage.

5. Formula Ko = Kd W d +Kp Wp + Ke We + Kr W r Where Ko - Overall cost of capital Kd - Cost of debt Kp - Cost of preference share Ke - Cost of equity Kr- Cost of retained earnings Wd- Percentage of debt of total capital Wp - Percentage of preference shatre to total capital We- Percentage of equity share to total capital Wr - Percentage of retained to total capital

6. Weighted average cost of capital is calculated in the following also Ko = ∑ xw ∑W Kw – Weighted average cost of capital X – Cost of specific sources of finance W- Weight, Proportion of specific sources of finance