Question

The WACC depend on the use of funds and not the source of funds. Discuss the statement

Answer 1

The WACC is the measure of cost of capital to a firm. Since risk for debt and equity holders are different, cost of debt and cost of equity are different even for the same project. Both source of capital and uses of capital are important in determining WACC. The source part determines the capital structure while the use part determines the risk adjusted part.

When we go for financing a project to the market, The market evaluates our proposal based upon the uses of capital and proposed yield you will generate out of the same project.Then we negotiate till deal is done.

Overall, The uses of fund is important in creating surplus for the investors as the higher the beat of rate of return over cost of capital, the more value an enterprize generates for its stakeholders.

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