WACC is expressed as a percentage, like interest. So for example if a company works with a WACC of 12%, than this means that only (and all) investments should be made that give a return higher than the WACC of 12%. In most cases it is clear how much a company has to pay their bankers or bondholders for debt finance.

What is weighted average cost of capital for dummies?

It’s defined as the average rate of return of a company’s suppliers of capital, and it’s the rate at which the future cash flows of the firm are discounted back to a present value for valuation purposes. All else equal, the higher the WACC, the lower the value of the firm.

What is included in the weighted average cost of capital?

There are many values included in the calculation of WACC, namely the market value of a company’s equity, the market value of a company’s debt, the cost of equity and cost of debt for that company, the total market value of that company’s financing, and the corporate tax rate.

How to calculate weighted average cost of capital for Starbucks?

Assuming that you are comfortable with the basic WACC examples, let us take a practical example to calculate WACC of Starbucks. Please note that Starbucks has no preferred shares and hence, WACC formula to be used is as follows – Market Value of Equity = Number of shares outstanding x current price.

Is the WACC the same as the marginal cost of capital?

Given that it is the cost that a company incurs to raise additional capital, the WACC may also be referred to as the marginal cost of capital (MCC). The formula for the WACC is:

How does weighted average cost of capital affect fair value of Alibaba?

As Weighted Average Cost of Capital increases, the fair valuation dramatically decreases. At the growth rate of 1% and Weighted Average Cost of Capital of 7%, Alibaba Fair valuation was at $214 billion. However, when we change the WACC to 11%, Alibaba fair valuation drops by almost 45%…