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Managing Projects College - Essay Example
weighted average cost of capital is an expression used to evaluate whether taking a certain course of action would be worth, this is because a company creates value of its share holders by adding value on there capital beyond their original contribution therefore necessitating the calculation of WACC.
Calculation of WACC is not a simple task as many would think, this is because the only part which is simple is calculation of the debt a firm has, these debt include the bank loan and other borrowing, however this is usually the beginning of the hard task since it known that the equity finance is usually more expensive than cost debt finance, this is due to the fact that equity finance has complex computation of the risk premium making computation of WACC complex. This computation of WACC is made more complex when determining which debts or equity should be used to increase the returns on capital of the share holders. The inclusion of corporate tax- rate in this computation adds more trouble while calculating WACC in view of the fact that interest payment is taxable.
From the above facts, I would not agree with the statement that calculation of the WACC is the easiest thing in the world because even though the formulae appears simple it cannot be interpreted in lay mans language, e.g. ...