weighted average cost of caoital

1. WEIGHTED AVERAGE COST OF CAPITAL
(WACC) (OVERALL COST OF CAPITAL - KO)
Presented By
Vikash Barnwal

2.  Meaning:
Weighted average cost is the average of the costs of specific
sources of capital employed in a business, properly weighted
by the proportion they hold in the firm's capital structure.
According to ICMA London:"Weighted average cost of
capital is the average cost of company's finance weighted
according to the proportion each element bears to the total
pool of capital, weighing is usually based on market valuations
current yield and costs after tax."

3. COMPUTATION OF WEIGHTED AVERAGE
COST
 The concept of weighted average cost is simple
and requires the following steps:
 1. Computation of weights (proportions) to be
assigned to each type of funds.
 2. Assignment of costs of various sources of capital.
 3. Adding of the weighted cost of all sources of
funds to get an overall weighted average cost of
capital.

4. BOOK VALUE & MARKET VALUE
 Book Value: Value shown in the balance sheet is called book
value. Weightage to each source of finance is given on the
basis of book value as recorded in the balance sheet.
 Market Value: Market value represent prices of prevailing in
the stock market for securities. So current market price are
applied in ascertaining the weightage.

5. FORMULA
 Ko = Kd Wd+Kp Wp + Ke We + Kr Wr
Where
Ko - Overall cost of capital
Kd- Cost of debt
Kp- Cost of preference share
Ke- Cost of equity
Kr- Cost of retained earnings
Wd- Percentage of debt of total capital
Wp- Percentage of preference shatre to total capital
We- Percentage of equity share to total capital
Wr - Percentage of retained to total capital

6. WEIGHTED AVERAGE COST OF CAPITAL IS
CALCULATED IN THE FOLLOWING ALSO
 Ko = ∑xw
∑W
Kw – Weighted average cost of capital
X – Cost of specific sources of finance
W- Weight, Proportion of specific sources of finance