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Sp6 principles of finance fin 101

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Running Head: PRINCIPLES OF FINANCE 1
Principles of Finance
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PRINCIPLES OF FINANCE 2
How is the WACC for a firm calculated? And What does the WACC for a firm tell us?
The weighted average cost of capital (WACC) refers to the average after-tax value of a
company`s several sources of capital such as common stock, preferred stock, bonds as well as
any other debts which are long-term. WACC can also refer to the average rate that a business is
expecting to pay to finance its assets. Bearing in mind that an organization`s financing is grouped
into debt and equity, WACC is the average cost incurred in raising that money which is
calculated equally to each of the sources.
A company`s WACC is calculated by multiplying the cost of each source of capital that
is both debt and equity by its relevant weight, and then adding the products together to determine
the value of WACC (Schwarzbichler, Steiner & Turnheim, 2018).
The weighted average cost of capital (WACC) tells us the lowest percentage of return at
which a business yields value for its investors. For example, if a company produces a return of
25% and has a WACC of 10% it implies that the company creates fifteen cents of value for every
dollar that it invests into capital.
What is the difference between business risk and financial risk?
There are several factors that differentiate business risk and financial risk. Firstly, when it
comes to duration, business risk will be there as long as the company exists where as financial
risk would be there until the equity financing is raised radically (Guiso, Sapienza & Zingales,
2018). Secondly, financial risk is disclosed by difference in the return of equity shareholders
whereas business risk is disclosed by difference in net operating income and net cash flows.
Again, business risk refers to the risk of inadequate returns to meet out the expenses while
financial risk is arises due to the use of debt financing in the capital structure. Lastly, business

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Running Head: PRINCIPLES OF FINANCE 1 Principles of Finance Students’ Name Professor’s Name Course Date PRINCIPLES OF FINANCE 2 How is the WACC for a firm calculated? And What does the WACC for a firm tell us? The weighted average cost of capital (WACC) refers to the average after-tax value of a company`s several sources of capital such as common stock, preferred stock, bonds as well as any other debts which are long-term. WACC can also refer to the average rate that a business is expecting to pay to finance its assets. Bearing in mind that an organization`s financing is grouped into debt and equity, WACC is the average cost incurred in raising that money which is calculated equally to each of the sources. A company`s WACC is calculated by multiplying the cost of each source of capital that is both debt and equity by its relevant weight, and then adding the products together to determine the value of WACC (Schwarzbichler, Steiner & Turnheim, 2018). The weighted average cost of capital (WACC) tells us the lowest percentage of return at which a business yields value for its investors. For example, if a company produces a return of 25% and has a WACC of 10% it implies that the company creates fifteen cents of value for every dollar that it invests into capital. What is the difference between business risk and financial risk? There are several factors that differentiate business risk and financial risk. Firstly, when it comes to duration, business risk will be there as ...
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