These days the world community is fast coming to terms with the recessionary trends in almost all sectors. The corporate world is under severe pressure to cut costs and do justice with the existing workforce.On the one hand companies are trying to gain valuable support from the respective governments; while on the other hand, all efforts are being made to do away with undue expenditures, and making the capital structure optimal in efficiency. Weighted Average Cost of Capital (WACC) is a fundamental approach towards making the capital structure the most advantageous for the company. No doubt companies might have undertaken such exercise many a times in the past, but the manner in which the industry is experiencing the pressure in today's context, makes it all the more necessary for the companies to have a relook at some of the policies and procedures for calculating the WACC. Therefore, this study is an effort to analyze the procedures adopted for calculating the weighted average cost and how companies make use of such calculations in arriving at sound financial decisions for their investment plans.Managers are supposed to make strategic moves on the basis of both external and internal analysis. They have to control costs and manage money for the ongoing operations as well as for the futuristic investments. This could be in the form of preparing or reviewing budgets, expense reports, or travel authorizations. It may be cash management or sales management. For financial management, markets and environments are assessed. Internally, operating and financial capabilities of the company/ organization are analyzed by using the hard facts, i.e. the financial statements, budgets etc.
Investment decisions happen to be quite crucial for a company and its business operations. Entrepreneurs often face the dilemma of adopting one type of capital structure as compared with alternatives available. There are a number of stakeholders involved in a business proposition. Besides the financial resources, the enterprise requires the support of human capital, intellectual capital, relationship capital etc. (Fletcher et al, 2003). While the efforts for optimizing other types of capital requires more of intellectual capital and internal control, the financial decisions for the company require a sound understanding of the fiscal position prevailing within the country/ region, the market position and the strategies being adopted by the competitive companies. The Weighted Average Cost of Capital therefore proves to be a handy tool in dealing with the financial decision and finding out the rate of returns that the company can expect in due course. The long term planning decisions taken with the help of WACC can also be reviewed during the course of operations, if it is found out that the actual figures are widely at variance with the expected rates of returns. The calculations of weighted average cost of capital involves according proportionate weight to each category of capital sources like, common stock, preferred stock, bonds and any other long-term debt1.
Managerial economics demands analysis of current and actual costs. In the cost-benefit analysis opportunity cost also emphasizes the role of judgment. Computerized calculation can be done while analyzing the financial details of one's own company,
These days the world community is fast coming to terms with the recessionary trends in almost all sectors. The corporate world is under severe pressure to cut costs and do justice with the existing workforce…
These sources are issuance of shares, debentures, long-term loans, plough-backs and short-term loans. Regardless of the source, the capital collected is invested in assets that differ in value and character. Even though capital needs to be viewed as whole, the concepts of “fund” and “assets” cannot be dismissed as they affect the valuation of the whole.
This cost is calculated as a weighted average, by taking into account the proportional relevance of each source, including the effects of taxes. If the cost of capital of a company is high,or it has a high WACC, the chances of its success are lower.A WACC higher than the company's after-tax returns means that the company is functioning at a financial loss: it tries to take up only those capital projects where the after-tax return is greater than the after-tax cost of providing returns to claimholders.
To increase the shareholders' wealth and firm's value in the market, it must have a capital structure which protects the interest of all stakeholders. Such a capital structure is known as the optimum/optimal capital structure. The present paper describes and analyses the capital structure Proton and find how an optimum capital structure is formed.
As more and more debts are attained, the cost advantage of debt over equity makes the weighted average cost of capital decrease until the point when more of cheaper funds and less of expensive equity funds are used. After this point, both the cost of debt and cost of equity start to increase hence the weighted average cost increases.
The author states that evaluating the financial ratios of CVS shows that it has a debt-equity ratio of 28.4% which has impressively improved as compared to where it stood a year ago, i.e. 38.65% in 2005. This shows that CVS is not highly leveraged and comprises of a large proportion of equity in its capital structure.
It shows the percentage of a company's equity that has been financed by external debts. The debt-to-equity ratio for Wal-Mart has been calculated as:
In the Weighted Average Cost of Capital (WACC) involves the calculation of separate items in the capital employed and then weighting the cost of each element by its proportion of the total capital employed.
Diagnostics India Limited, is principally involved in the manufacturing, marketing and servicing diagnostics products that provide effective ways to assist in the diagnosis, monitoring and management of disease; and (2) Merge Healthcare Incorporation (formerly known as Merge
Based on the proportion of funding from each source, an organization can calculate its “weighted average cost of capital”, i.e. the average cost of capital for the organization based on the percentage of funding
The company needs to determine the best proportion of equity and debt that will keep the cost of capital at minimum, and which can be effectively managed by the firm. The overall cost of capital is measured by the weighted average cost of capital (W.A.C.C).
Respectively, I conjure that varied capital sources are typically based on different costs and thus, needed appropriate analysis for designing an optimal capital structure for raising required finance appropriately (Grundy, n.d.).
In businesses, sources of
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