Weighted Avarage Cost of Capital Research Paper Example | Topics and Well Written Essays - 500 words

Weighted Avarage Cost of Capital - Research Paper Example In other words, WACC also indicates about the minimum required return on the total project outlay. The cost of equity is directly proportional to its return. That means higher the return on equity; the greater will be the cost of equity. In other words, higher return will increase the weighted average cost of capital. The calculation of WACC often helps to determine the economic feasibility while undertaking any mergers of the two different entities or expanding existing business activities. WACC is the actual cost that takes into account both equity and debt based on their actual proportion involved and that is why it is the most appropriate rate while doing capital budgeting exercise. When an organization raises any long-term capital, the WACC cost will get altered as per the new proportion of equity and debt. Initial public offering is made to raise the capital (equity) required for the project. When the promoter of the project is unable to finance the project fully through their own resources, they go to public and issue part equity and thereby raise the capital required for the project. Thus, depending upon the confidence levels shown by the public in the promoter and their project, the required amount in the form of the equity can be raised. This additional capital raised from the public completes the minimum requirement of the equity as proposed by the institutions. Usually, the financial institutions appraise the project and provide the necessary debt necessary to meet the entire financial needs of the project. Each time, when funds are needed for expansionary purposes, the financial needs are met through equity and debt components derived in an appropriate proportion. Mergers and acquisitions are done to take advantage of synergy in the operations. In mergers, two organizations merge and form a single organization. Shareholders of the