Hello, Bit Chan Eun

Well written! I want to contribute to this new discussion thread by describing the use of

WACC and its benefits.

Corporations continuously monitor their expenses. Everyone is aware that when expenses

are kept to a minimum, earnings growth indirectly raises the worth of your company. Like other

charges, the weighted average cost of capital refers to the price businesses pay for capital. Debt

or equity are both forms of capital (Krüger, Landier & Thesmar, 2015).

WACC Use

WACC is commonly used in the financial sector to assess whether a product, project, or

company will generate a return on investment greater than or equal to the cost of invested capital

(equity + debt). Additionally, ROIC performance can be measured against WACC as a hurdle

rate. It is also used for determining economic value added (EVA) (Arnold & Crack, 2004).

Advantages of WACC

The major advantage is that WACC has the firm’s capital structure considered. For

example, if a firm mostly implements debt financing, its weighted average cost of capital will be

more similar to its cost of debt compared to its cost of equity (Cohen, 2004).

WACC is another variable that businesses consider to raise the firm's worth. The value of

the company will increase as the WACC decreases. A business that wishes to lower its WACC

could look at a less expensive funding source. For instance, since bonds will be more cost-

effective, they can issue more of them than stocks. Since debt is less expensive than equity, the

debt-to-equity ratio will rise, and the WACC will eventually fall (Budhathoki & Rai, 2020).
 I referenced Apple Company in my initial post when discussing gearing ratios; now,

please describe how WACC is implemented at Apple Company.

References

Krüger, P., Landier, A., & Thesmar, D. (2015). The WACC fallacy: The real effects of using a

special discount rate. The Journal of Finance, 70(3), 1253-1285.

https://doi.org/10.1111/jofi.12250

Arnold, T., & Crack, T. F. (2004). Using the WACC to value real options. Financial Analysts

Journal, 60(6), 78-82. https://doi.org/10.2469/faj.v60.n6.1909

Cohen, R. D. (2004). An analytical process for generating the WACC curve and locating the

optimal capital structure. Wilmott Magazine, 86-95.

Budhathoki, P. B., & Rai, C. K. (2020). The Impact of the Debt Ratio, Total Assets, and Earning

Growth Rate on WACC: Evidence from Nepalese Commercial Banks. Asian Journal of

Economics, Business, and Accounting, 15(2), 16-23.

https://doi.org/10.9734/AJEBA/2020/v15i230210