WHAT IS WACC ?
The weighted Average Cost of capital also Known as WACC is the total required rate of return for those who supply capital to a company. These suppliers of financing must be both debt and equity investors.
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For you to be able to value a company, value a capital budgeting project, understand the capital structure of a company, calculate the EVA(economic value added) and ROIC(return on invested capital) of a firm, you must use the WACC(weighted average cost of capital) component in your analysis. If not, your analysis is as better as no work done.
In a company valuation, after the development of the Free Cash Flows to the firm, the WACC component of that firm is required for the discounting of all these free cash flows to their present value.
In a Capital Budgeting Project analysis, after developing the expected After Tax Operating Cash flows and the Terminal Value after tax non-operating cash flow for a project valuation, you must discount all these future cash flows to their present value in order to determine if the project will be creating value for the company or destroying value for the same company. The main component in the discount factor used for discounting these cash flows is the WACC.
In order to determine the capital structure of a company that will help you to maximize profits and minimize the cost of financing for the same company, you will need to have a perfect understanding of the WACC concept and how it is calculated. without which you will likely not achieve a top results of your analysis.
For you to calculate the EVA (economic value added) which is the value a company creates in excess of the required return of the company from the core or operational part of the business. Which is determined by deducting the taxes the company has to pay to the government after obtaining her EBIT (operating Profit) to get NOPAT (Net operating Profit after tax). From the NOPAT gotten, we have to subtract operational invested capital (which comes from operational investment, multiplied by the company’s WACC).
Looking at these above concepts in which the WACC plays a primordial role in their analysis, you can without doubt understand the indispensable nature of the WACC concept in any company.
As a Financier, or an individual in the business milieu, the WACC concept is a must-know financial concept if you have to make a top notch financial analysis, and at the same time making impactful decisions at your job site and(or) your business.
In this course, we are going to drill you through a detailed but simple understanding of the WACC concept, narrowing in this concept into balance sheet to show you how this concept fits into the capital structure of a company.
We shall go through the different components of the WACC formula, analyzing the distinct capital proportions that make up a WACC formula.
We shall also analyze the Cost of debt which is a WACC component, and how this cost of debt is calculated for both a private and a public company.
Next will be the detail analysis of the cost of equity and its distinct components, here, we shall learn how the cost of equity is calculated for both public and private companies using the CAPM(Capital Asset Pricing Model), with special emphasis being placed on the Beta calculation and how it should be interpreted.
Each section analyzed above, comes with a well explained practical example.
Then finally, we shall move to the calculation of a company’s WACC, using a real-world business case study, and also detailing out the steps required to calculate the WACC of a company in a developing Economy.
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