The weighted average cost of a business refers to the different types of financial resources that the company deals with. The sum that is the WACC is calculated by adding up the total capital and reducing the axes involved with each financial resource.
These sources may include retained earnings, stock, debt as well as equity. The WACC is basically the average of the amount that a business needs to pay its security and stakeholder to finance the assets. There are various factors which affect the WACC, and this article specifically talks about these.
Economic Conditions
When a bank provides a company with easy loans to alleviate stability, the company’s debts are reduced subsequently. However, the cost of equity rises with this. The economic conditions of a country can also tend to affect the same.
One can calculate the weighted average cost of capital of their business using WACC calculator available on various reputed websites on the internet. These online calculators are effective and can calculate your WACC accurately.
Capital Structure
The value of debt to equity ratio also has an impact on your business’s weighted average cost of capital. If the debt is more massive than the share capital, then cost will subsequently become more. Moreover, if the stock capital is larger than the debt, the paying cost of equity has to be paid.
The capital structure affects your business finances and is yet another factor which can alter your WACC.
Dividend Policy
Each company dealing which large capitals and financial needs have a dividend and a policy with it. The amount of total earning of a company is the amount payable to debenture holders in the form of dividends.
Each financial year, the managers of the company calculate these costs and forwards the information to the owner so that the payments could be made.
New Funds Received
If your business requires funds to meet a business need, you might need to turn up to the financial institution to raise funds. This condition might also lead the financial institutions in a more substantial risk, they eventually will increase the interest which you will have to bear to keep your business operations intact.
Therefore, your business becomes bound to accept the rate of interest and pay what is asked for. This might also affect the business’s cost of capital.
Income Tax Rates
Every profitable business needs to pay taxes. These would vary from time to time – both due to changes in legislature and due to changes in the particular tax bracket the company ends up in. Countries which adopt a flat-tax-rate policy have a much more predictable tax burden, and thus WACC is easier to calculate in a predictive manner.
Any change in tax rates can alter your company’s WACC. The higher the taxes, the lower is the cost of capital and the lower the tax, the higher is the cost of capital.
