Advantage of weighted average cost of capital, Financial Management

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Advantage of Weighted Average Cost of capital

1) Straight Forward and logical: Weighted Average ost of Capital defines the oveall cost of capital as the sum of the cost of the individual component of the capital structure . it employs a direct and reasonable method logy and is easily calculated eight her manually or with the assistance of the computer.

2) Build on individual debts and equity components: because it is comprised of the cost of the each debts and equity security, the weighted average technique in facts reflect as small changes in the firms overall cost of the capital.

3) Accurate in period of normal PROFITS: when the firms is realize a reasonable level of profits the weighted average cost of the capital is a fairly accurately cut off point for the selection of the new capital budgeting capital proposal, since it takes into consideration the relatively low costs of the debts securities and needs to continue to achieve the higher return require to increase the value of the common stock.

4) Accurate when the debts level is reasonable; the use of debts and the accompanying favorable financial leverage will actually lower cut rate off point needs to maintain or increase the value of the firm . if the debts level of the is not excessive , the weighted average method will properly handle the lower cost of debts as a component in the firm overall cost of the capital.


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