The Application of the Weighted Average Cost of Capital

With the gradual increase of the income approach used in our assessment practices, new issues are also gradually increasing. Income approach as before most of the appraisers as best placed to exploit the assets of Canadian and French historical cost as the basis, but needs more analysis and judgment, there is more change and uncertainty. What is the importance for the business is raising finance. Therefore, which choice for the Business; Equity Capital or debt Finance? With the increase of the risks, the cost of capital is also on the way of increasing. However, if we use the WACC, we could have the similar result as before.

Therefore, the Weighted Average Cost of Capital (WACC) is more applied at the present. WACC used to measure a company's cost of capital in financial activities. Because the cost of financing is seen as a logical price tag, it was used as a discount rate of financing projects. WACC reflecting the average cost of a company through equity and debt financing, project financing, the rate of return must be higher than the weighted average cost of capital investment value.

As an example, Eurozone seeks central banks' help in Greek bail-out. Eurozone governments are looking to the European Central Bank and national central banks to help pare back the cost of a second rescue package for Greece which would otherwise amount €170bn.

                                         

Figures seen by the Financial Times reveal Greece needs €136bn in fresh bail-out funding from the European Union and International Monetary Fund – in addition to the €34bn left over from Greece’s first bail-out. This is €6bn more than EU leaders agreed in October. Germany, the Netherlands and Finland have insisted on paying no more than €130bn.

All of these phenomenons tell us the information that the Eurozone have many crises needs to be solved moreover only seeking the help from the central bank. Firstly, they should take the necessary measures to stabilize the people's heart has been affected by the situation as soon as possible. Secondly, some unnecessary expenditure should reduce or avoid, which is a kind of measure to reduce the cost of margin. Thirdly, the relevant government should be prepared to investigate and develop some new projects, then can make it back on track and re-make a profit, which make the real sense of getting rid of the present situation and take a new lease of life.

In my opinion, although this news is refers to the European government; however, we could considered it as a larger version of evolution assistance and financing from the financial crisis. They play the roles for the Government National Banks instead of the companies. In another way, the Eurozone should show its profitability and the control the relevant.

From the above case, it could help us to find the application of the WACC in the real world more than understanding the definition in the book and explain the reason for the decision making and how to apply the WACC to evaluate the business. The application of the WACC is various and useful, it can decide that the project evaluation method of operation, which has a very important reference value and the actual role.

Sources: Global Economy, The Financial Times, BBC News.