馃攳
馃敶 Weighted Average Cost of Capital (WACC) in 3 Easy Steps: How to Calculate WACC - YouTube
Channel: unknown
[1]
WACC in 3 Easy Steps - How to Calculate Weighted
Average Cost of Capital Finance
[2]
Hello and welcome back again to MBABullshit.com.
[7]
So our topic for this video is WACC or the
Weighted Average Cost of Capital.
[17]
So before anything else, remember you can
always go back to MBAbullshit.com.
[23]
There are lots of different videos on business
topics for business students, MBA students,
[33]
business college students, BBA students, etc.
[37]
But before we move on, I鈥檇 like to point
out that I highly recommend that before watching
[47]
this video, she already understand the concepts
of Present Value, Future Value, Internal Rate
[56]
of Return and Cost of Equity.
[58]
If you don鈥檛 know those yet, then you might
want to first watch my other free videos on
[68]
these topics above.
[71]
Alright so let's get down to it.
[74]
So first of all before we move on, I鈥檇 like
to ask you first.
[84]
What is the meaning of Capital in the business?
[87]
I鈥檓 not talking about the capital of America
Washington DC or whatever.
[94]
When we talked about a business, what do we
mean by Capital?
[98]
Well, it means, it talks about the money which
is used to start or run or expand a business.
[110]
For example, in this case here, let鈥檚 say
you want to put up a store, a store business;
[117]
you need money so that you can buy the products
to sell in the store, so that you can buy
[123]
the shelves in the store, so that you can
buy the uniforms in the store and things like
[130]
that.
[131]
So the money that you used to start your business
is called Capital.
[137]
Now the next question is where does Capital
come from when you put up a business?
[146]
Well, there are two main sources.
[151]
There are usually two places from where you
get Capital.
[157]
The first place is or the first way is to
borrow from banks.
[164]
Sometimes you don鈥檛 have enough money to
put up your own business and so you borrow
[170]
money from the banks and this is called Debt.
[180]
The next source or the other source, other
mean source is when the owners or the investors
[190]
such as yourself put your own money into the
company.
[197]
And this is called Equity.
[199]
In MBABullshit language or in business bullshit
language, we don鈥檛 say borrowing from the
[208]
banks because it doesn鈥檛 sound too good,
it doesn鈥檛 sound too sophisticated.
[213]
So instead we say Debt.
[216]
And when the owners put their own money in
the company, it doesn鈥檛 sound so pretty
[223]
either, so we use the word Equity.
[226]
Now, let鈥檚 asked ourselves what is the Cost
of Debt?
[235]
Remember, Debt is different from Cost of Debt.
[242]
So what is the difference?
[244]
What is the Cost of Debt?
[246]
Well remember that Debt means you鈥檙e borrowing
from the bank and so the Cost of Debt means
[255]
or usually means the bank interest rate percentage
that is charged to your company.
[263]
For example, remember when the bank lends
you money, they don鈥檛 lend you the money
[271]
for free.
[273]
The bank needs to earn money from lending
you money so the bank will charge you an interest
[281]
rate.
[282]
For this example, let鈥檚 just pretend; let鈥檚
just assume that it is 5%.
[292]
Now let鈥檚 go to the next source of Capital
which is Equity.
[297]
And we also ask; what is the Cost of Equity?
[305]
When you put your own money in the company
or when your investor or your friend maybe
[311]
puts his money in your company so that he
can be a partner in your company or he can
[318]
be a shareholder in your company.
[324]
Many people think that when you put your own
money in a company or when an investor put
[333]
his or her own money in a company, then it鈥檚
free because you don鈥檛 have to pay interest
[342]
rate of 5% like with Debt.
[346]
So people think that the Cost of Equity is
free.
[351]
Well actually it鈥檚 not free.
[357]
Why is it not free?
[358]
It鈥檚 because there鈥檚 what we called an
expected return or expected profit from these
[366]
owners or investors.
[368]
If your friend or maybe not your friend or
investor like this scary lady over here puts
[376]
her money in your company, it鈥檚 because
she expects to earn money from putting her
[382]
money in your company.
[385]
She expects to earn money from her investment
and this is called an Expected Return.
[394]
And this is usually higher than bank interest
rates.
[401]
Why is it higher than that?
[404]
Because if you鈥檙e going to pay her or if
she going to earn less than the bank interest
[412]
rates then it鈥檚 better for her to put her
money in a risk free deposit in the ban instead
[424]
of in your company.
[427]
So usually this is higher.
[429]
Now in this case let鈥檚 just pretend that
it鈥檚 10%.
[439]
However in other problems, it might not be
as simple as 10% maybe in our case I鈥檓 giving
[451]
you the information, I鈥檓 telling you it鈥檚
10% but in other cases you might be given
[459]
other information and then you would have
to compute this amount yourself using the
[470]
CAPM or the Capital Asset Pricing Model or
Cost of Equity formula which I already talked
[478]
about in my other video.
[482]
But in this case, let鈥檚 just pretend we
already know that the expected return, the
[490]
expected profit of the owner or the investor
is 10%.
[499]
So now we move on.
[502]
Let鈥檚 ask ourselves the next question: what
is the cost of Capital?
[510]
Remember Capital comes from either Debt or
it comes from Equity.
[519]
So what is the Cost of Capital?
[523]
Well it鈥檚 easy.
[526]
It depends where did you get your money to
start or run the company.
[534]
Did you get it from Debt?
[537]
Or did you get it from Equity?
[540]
Where did you get it?
[543]
Which one did you get it from?
[546]
Now, if you got your money from bank borrowing
at 5% interest as you remember from the last
[558]
slide then your Cost of Capital is exactly
the same as your Cost of Debt which is 5%.
[571]
You remember here it鈥檚 5%.
[575]
So it鈥檚 the same.
[577]
It鈥檚 the same if you got your money from
bank borrowing at 5% then your Cost of Capital
[586]
is the same.
[587]
It is also 5%.
[588]
debbierojonan Page 1
Most Recent Videos:
You can go back to the homepage right here: Homepage