Approach and Concepts to calculate cost of Capital

The weighted Average Cost of Capital refers to the average price of return that a firm should pay to creditors and shareholders.  Financial analysts normally focus on a company’s total capitalization, which is the capital structure or mix of long- run sources of finance used by the company. Firm’s capitalization consists of bonds, preference shares and common stock as per our Ratio analysis assignment help experts. To estimate the WACC, one need to identify the capital constitution mix and the cost of all the sources of fund utilized. The vital assumption in any system of weighting is that the company will definitely increase capital in the specified proportions. These firms hike funds marginally to make incremental investments in latest projects. Thus the capital cost of the marginal is used wholly in the firm instead of using the firm’s capital in general.
The Heinz case assumptions incorporates that the firm managers have to leave their own desires and concentrate on maximizing the wealth of stockholder (Brynjolfsson, McAfee, and Cummings p12). This might happen due to the fear of being replaced by stockholders during their annual gathering or board of directors meetings or because they hold sufficient stock in the company thus maximizing wealth of stockholder becomes their core as well. Secondly, it’s assumed that the lenders to the company are totally protected by stockholders from expropriation. This can happen due to the effect of reputation. The stockholder will not take any step which hurts their lenders when borrowing funds in future (Brynjolfsson, McAfee, and Cummings p18). Lenders have also the right to fully protect themselves through writing agreements forbidding the company from taking any hurting steps on their end. You can learn the concepts also through our accounting homework helper experts.
Besides the scenario assumption is that managers of the company do not try to lie or mislead to financial markets on the company’s future vision. This is due to enough ideas for the markets to do judgments about the impacts of actions on long run value and cash flow (Christian). In conclusion, the social benefits or social costs are absent (Christian). All costs made by the company in its effort of maximizing the wealth of stockholder can be charged and traced to the company. With these mentioned assumptions, there is lack of side costs in maximization of stock price. Therefore, managers can focus on stock prices maximization. In the practice, wealth of stockholder and company value will be utilized and community will be well again.

calculation of WACC
WACC=Cost of debt + cost of equity
cost of debt
cost of equity


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