Cost of long-term funds - part 4

In this lesson

1. 0:00 Introduction to weighted average cost of capital
2. 1:40 Worked example: calculating WACC step by step
3. 3:38 Key assumptions and limitations of WACC
4. 4:09 Summary: cost of long-term sources of finance

About this lesson

WACC combines the cost of equity and cost of debt, weighted by their proportions in the company's capital structure, and is essential for investment appraisal and corporate finance decisions across ACCA and CIMA papers. The video breaks down the WACC formula into manageable parts, showing you how to find the proportion of equity and debt financing, then multiply each by its respective cost. You'll work through a practical example where a company with £30 million equity (costing 14%) and £90 million debt (costing 8.5%) calculates a WACC of 9.8%. This step-by-step approach makes the calculation straightforward, even though the formula might initially look intimidating. You'll also explore the key assumptions underlying WACC: that risk levels remain constant, that financial and business risk don't change, and that market values are available. Understanding these limitations is important for applying WACC appropriately in real scenarios and exam questions. This lesson completes the chapter on cost of long-term sources of finance, bringing together everything from risk and return hierarchy through to equity costs, debt costs, and now the blended capital cost.

Duration: 5m