Weighted average cost of capital (WACC) - part 1

In this lesson

1. 0:00 Introduction to Weighted Average Cost of Capital
2. 2:29 How WACC fits into project appraisal
3. 3:25 Simple WACC calculation example
4. 4:48 Understanding the WACC formula
5. 7:27 Five-step technique for complex calculations
6. 9:03 Calculating market values of equity
7. 9:16 Calculating cost and value of debt
8. 10:01 Handling multiple debt types in WACC

About this lesson

It's used as the discount rate in NPV calculations to determine whether a project earns enough to cover its financing costs. This is essential knowledge for Financial Management and Performance Management papers, where WACC forms the foundation of investment decisions. The video starts with a straightforward example to build your confidence. You'll see how WACC combines the cost of equity (what shareholders expect to earn) and the cost of debt (interest payments), weighted by how much of each type of capital the company uses. The formula looks complex at first, but the underlying logic is simple: average these two costs based on their relative proportions. Understanding this concept now will make the formula feel much less intimidating when you tackle it in practice. To help you apply this consistently in exams, you'll learn a five-step technique. The approach guides you through calculating the cost of equity first (using either dividend growth model or CAPM), finding the market value of equity, calculating the cost of debt, determining the market value of debt, and finally substituting everything into the formula. The video emphasises using market values rather than book values and being methodical with each element. This structured method ensures you'll get the right answer every time, even when exam questions throw multiple types of debt at you.

Duration: 10m