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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

How should the capital structure weights used to calculate the WACC be determined?

Summary Introduction

To determine: The way of determining capital structure weights to calculate the WACC.

Introduction:

Weighted Average Cost of Capital (WACC):

It is the weighted average cost of all the sources through which firm finances its capital. It is that rate that the company will pay to all for raising finance. It can be termed as the firm’s cost of capital.

The company raises money through various sources such as common stock, preferred share debt the WACC is computed taking the relative weight of each item of capital structure.

The formula to calculate WACC is,

WACC=Wdrd(1t)+WPrp+Wcrs

Where

  • Wd is the weight of the debt
  • WP is the weight of the preferred stock
  • Wc is the weight of the equity
  • rd is cost of the debt.
  • rP is cost of the preferred stock.
  • rc is the cost of the equity
Explanation
  • The concept of historical weights assumes the firm can raise the financing for investment proposed only in the proportion which these appear in the present capital structure like firm present capital structure...

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