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The cost of ccapital

Thee weigghted averaage coost of ccapitaal

(WAACC)

5.1 AAssumption

Funds from each source of long-term finance arre pooled together annd used to
financee the variouus investmment projeccts.

Therefoore a weighted averaage cost off these souurces of finance is apppropriate tto
evaluatte the investment proojects.

5.2 WWACC calcculation

 CCalculate weights for eeach sourcce of capitaal.

 Estimate thee cost of each sourcee of capital.

 MMultiply proportion of ttotal of eacch source by its cost and sum tthe results, using
thhe formula::

VV e V d
WACC = –––––––– k e ++ –––––––– ‘k d(1 – T))’
V e ++ V d V e + V d

V e aand V d are the markeet values off equity and of debt

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