Why is the Weighted Average Cost of Capital so exalted?
Answers:
Because it tell you how much return you inevitability to produce to gratify the different fund providers of your company, close to bank, long-term receivables from other financial (or other) sources as ably as giving support dividends to shareholders. All these stakeholders own different expectations on return.
To simplify to the extreme, bank roughly enjoy a fixed rate, lower than shareholder return expectations because the latter carry also sophisticated risk. An average of adjectives these return expectations weighted by the amount of property respectively provided/contributed, give you your WACC.
Assuming you own 50% of your wealth provided by a long-term loan from a sandbank at 5% and the rest is shareholding assets within an industry that for similar risk returns in the order of 7% (so will and so your shareholders expect 7%), your WACC is 6%. Any investment the company make requirements at least possible to return 6% so that it can take-home pay the interest on the loan from the guard and return 7% to its shareholder. It is what we hail as a hurdle rate: below no-go, above go-ahead.
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