Importance of managing the firms weighted average cost of capital Essay

Importance of managing the firms weighted average cost of capital (WACC) - Essay Example Managing WACC thus means keeping the WACC value lower than the company's after-tax returns, or in other words, reducing the cost of capital.This can be done by financing a major percentage of the purchase with the lowest cost of capital available, secured debts for instance, and the rest with personal equity held as cash, or by means of capital prioritisation, that is, using the cheapest source of capital first. A low WACC means that investors will be interested in the company in case additional capital needs to be raised for expansion or other purposes. Calculating WACC is often tricky because though the cost of debt is easy to track down, cost of equity can be an elusive factor. But it is worth the exercise, because knowing its WACC helps a company to try and restrict the WACC value for projects to levels far below those of its after-tax returns, thus adding to profitability. All firms need to take recourse to loans at some stage of their life cycle. But they need to carefully and critically evaluate their loan agreements, whether in the public or the private sector.