What estimates are involved in the Weighted Average Cost of Capital formula? Do you feel these estimates are reliable or do they invalidate the use of this measure?

Answer:

(WACC) Weighted average cost of capital is  average of  minimum after-tax required rate of the return which any company must earn for all  its security holders

Formula for (WACC) Weighted average cost of capital

WACC = r(E) × w(E) + r(D) × (1 – t) × w(D)

E
=
Market value of equity

D
=
Market value of debt

P
=
Market value of preferred stock

The following are estimates used at the time to calculating WACC:

• WACC should comprise athe weighted-average of marginal costs for all the sources of capital (equity ,debt, , etc.) .
• (WACC) Weighted average cost of capital should computed after the corporate taxes, since  the UFCFs is computed after-tax.
• (WACC)Weighted average cost of capital should  use nominal rates of the return to  built up from the  real rates &  expected inflation, because  expected UFCFs are generally expressed in the nominal terms.
• WACC should adjusted for  systematic risk face by each provider of the  capital, because each expects  return that  is compensates for  risk assumed.
• Long-term WACCsmust incorporate the  assumptions regarding to the  long-term debt rates and  not just  the current debt rates.

All these estimates are reliable and use to calculate the (WACC) Weighted average cost of capital