Please forward this error screen to 67. Please forward this error screen to expected return on invested capital. This is composed of a possible combination of debt, preferred shares, common shares and retained earnings. All components of the cost of capital are determined at the current market rates.
What is WACC Weighted Average Cost of Capital? When a firm needs to raise capital to buy assets, the capital can be raised from several sources. Investors will by equity shares in the company, investors will buy the company’s bonds, and the company can keep the profits earned through its operations. Any combination of these sources can be used to pay for capital projects. If an individual were to borrow money they would be expected to pay interest on that money. If the individual then invested these funds it makes sense that the investment return should exceed the interest cost of the borrowed funds.
This is the same concept that applies to the WACC Weighted Average Cost of Capital of a firm. A firm is expected to make decisions regarding the use capital to benefit shareholders. If the company cannot make a capital investment that will increase returns for shareholders, then it would be expected that the money would be best delivered directly to the shareholders as a dividend. WACC Weighted Average Cost of Capital then becomes the hurdle rate for capital projects. A capital project is made when a firm purchases assets, with the intention of generating revenue that will exceed the cost of capital.