Here are some notes on Weighted Marginal Cost of Capital (WMCC) in detail:
- Weighted Marginal Cost of Capital (WMCC) is the cost of raising an additional dollar of capital for a company. It is calculated by weighting the marginal cost of debt and equity, based on the proportion of each in the company’s capital structure.
- The WMCC is an important metric for companies because it helps them to determine the cost of raising new capital. The WMCC is also used to calculate the value of a company.
- The WMCC is calculated as follows:
WMCC = (Weight of Debt * Marginal Cost of Debt) + (Weight of Equity * Marginal Cost of Equity)
- The weight of debt is the proportion of debt in the company’s capital structure.
- The marginal cost of debt is the additional cost that the company would have to pay if it were to borrow an additional dollar.
- The weight of equity is the proportion of equity in the company’s capital structure.
- The marginal cost of equity is the additional return that investors would require if the company were to issue new equity.
- The WMCC can be used to calculate the value of a company by discounting the company’s future cash flows using the WMCC.
- The WMCC can also be used to determine the cost of raising new capital for a project by multiplying the WMCC by the risk of the project.
Here are some of the additional things to keep in mind about WMCC:
- The WMCC is a dynamic measure, meaning that it can change over time as the cost of debt and equity changes.
- The WMCC is a theoretical measure, meaning that it is not always an accurate reflection of the actual cost of raising new capital for a company.
- The WMCC is a useful tool, but it should not be used as the sole factor in making investment decisions.