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                  BRILLIANT’S                         Cost of Capital                               313


                  Weighted Average  Cost  of  Capital         H¡${nQ>b H$s doQ>oS> EdaoO H$m°ñQ> (WACC)
                  (WACC)
                      Weighted Average Cost of Capital (WACC)     H¡${nQ>b H$s doQ>oS>  EdaoO H$m°ñQ>  (WACC) H$mo
                  is commonly referred to as the firm's cost of  gm‘mݶV… g§ñWm Ho$ H¡${nQ>b H$s H$m°ñQ> H$hm OmVm h¡& Bgo
                  capital. It is dictated  by the external market  ~mø ~mOma go nVm bJm¶m OmVm h¡ Z {H$ ‘¡ZoO‘|Q> Ûmam&
                  and not by management.
                      WACC is a calculation of a firm's cost of   WACC g§ñWm Ho$ H¡${nQ>b H$s H$m°ñQ> h¡ {Og‘|
                  capital  in which  each category  of  capital  is  H¡${nQ>b H$s à˶oH$ loUr H$mo AmZwnm{VH$ ê$n go aIm OmVm
                  proportionately  weighted.  All  sources  of
                                                              h¡& H$m°‘Z ñQ>m°H$, {à’$S>© ñQ>m°H$, ~m§S²>g VWm {H$gr Aݶ
                  capital, including  common stock,  preferred
                                                              XrKm©d{Y S>oãQ> g{hV H¡${nQ>b Ho$ g^r òmoV WACC JUZm
                  stock, bonds and any other long-term debt, are
                  included in a WACC calculation.             ‘§o gpå‘{bV {H$¶o OmVo h¢&
                      A  firm's WACC  increases  as  the rate  of  EH$ g§ñWm H$m WACC ~‹T>Vm h¡ O~ Bp³dQ>r na
                  return on equity increases, because an increase  [aQ>Z© H$s aoQ> ~‹T>Vr h¡ ³¶m|{H$ WACC ‘| EH$ d¥{Õ ‘yë¶m§H$Z
                  in WACC denotes a decrease in valuation and  ‘| H$‘r àX{e©V H$aVr h¡ VWm Omo{I‘ ~‹T>Vm h¡&
                  an increase in risk.
                      To calculate WACC, multiply the cost of     WACC H$s JUZm H$aZo Ho$ {bE à˶oH$ H¡${nQ>b
                  each  capital component  by  its  proportional  KQ>H$ H$s bmJV H$mo BgHo$ g‘mZwnm{VH$ ^ma go JwUm H$a|
                  weight and take  the sum of the  results. The
                  method for calculating WACC can be expressed  VWm n[aUm‘ H$m ¶moJ {ZH$mb|& WACC H$s JUZm H$aZo Ho$
                  in the following formula:                   {bE {d{Y H$mo {ZåZ ’$m°‘y©bm ‘| 춳V {H$¶m Om gH$Vm h¡…
                                                    D K d  E K    e   P K    RE  K  r  
                                                                       p
                                            WACC 
                                                             D E P RE  
                      Where,
                          K = Cost of debt.                            K = Cost of preference share:
                            d                                            p
                          K = Cost of Equity.                           K = Cost of retained earning
                            e                                            r
                           E = Equity share capital.                    D = Debts.
                          RE = Retained Earnings                        P = Preference share capital.

                  Limitations of Weighted Average Cost of     H¡${nQ>b H$s doQ>oOS> EdaoO H$m°ñQ>  (WACC) H$s
                  Capital (WACC)                              gr‘mE±
                      The  WACC  formula  seems  easier  to       WACC ’$m°‘y©bm H$s JUZm H$aZm dmñVd ‘| gab
                  calculate  that  it  really  is,  because  certain  àVrV hmoVm h¡ ³¶m|{H$ ’$m°‘y©bm Ho$ Hw$N> VËd O¡go Bp³dQ>r H$s
                  elements of the formula, like cost of equity (K ),
                                                         e    H$m°ñQ> (K ) g§JV> ‘mZ Zht h¡ {d{^ÝZ nj {d{^ÝZ H$maUm|
                                                                     e
                  are not consistent values, various parties may  go CÝh| {^ÝZ ê$n ‘| ~Vm gH$Vo h¢& AV… My±{H$ S>ãë¶yEgrgr
                  report them differently for different reasons.
                  As such, while WACC can often help to lend a  A{YH$m§eV… EH$ H§$nZr Ho$ ‘yë¶dmZ ahñ¶ XoZo ‘| ghm¶Vm
                  valuable insight into a company, one should  H$aVm h¡, Bgo Aݶ ‘¡{Q´>³g Ho$ gmW Cn¶moJ H$aZm Mm{hE
                  always use it along with other metrics when  O~ {ZYm©[aV H$aVo h¢ {H$ EH$ H§$nZr ‘| {Zdoe {H$¶m Om¶o
                  determining  whether or  not  to  invest  in  a  ¶m Zht&
                  company.
                      SOLVED PRACTICAL
                             QUESTIONS
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