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Weighted average cost of capital WACC is about the different types of finance sources that can occur. The amount of money is thus calculated by summing up the whole capital and reducing the tax cost of each source. The sources include stocks, debt, equity and retained earnings. Next, our factors affecting WACC assignment help mentions the factors that influence it.
Factors that affect the WACC:
- Economic conditions
When banks can easily give loans at low rate of interest to increase their stability, then the company’s debt will decrease, and the cost of equity will increase. Well, it is not just limited to bank, it can be said that any economic conditions can be applicable for the same.
- Capital structure
Debt equity ratio will always affect cost of capital because if the debt is greater than share capital, then cost of capital would become more. But if the stock capital exceeds the debt, the pay cost of equity has to be paid.
- Dividend policy
Every company has its dividend policy. The amount of total earning is the company’s interest to be paid as dividend.
- Receiving new fund
If any business requires a certain amount immediately for certain purposes, then the company will needpaying a real high rate of interest, and with it, the risk of financial institution will also increase. Therefore the company is bound to follow the new rate of cost of capital that might affect business’s cost of capital rate.
- Financial and investment decisions
When any business gets a new share capital, they have to mention the causes to fund provider for using their capital. If they find it’s too risky, then both of creditors and shareholders will receive high rewards.
- Income tax rates
Any business after earning money, they deduct interest charges, tax charges. Therefore, for higher tax rates it will affect the cost of share capital and vice versa.
- Breakpoints of the marginal cost of capital
Break pointis equal to amount of money at which sources of cost of capital changes or proportion of new capital will be raised from this source.
Following are the main points of breakpoints:
- Debt
- Preference share
- Equity share capital
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