WACC: Practical Guide for Strategic Decision-Making – Part 1

Is Estimating the WACC Like Interpreting a Piece of Art?

This seven-part series, authored by Zanders consultants, provides CFOs and corporate treasurers with a better understanding of the weighted average cost of capital (WACC), which is recognized as one of the most critical parameters in strategic decision-making. The series highlights strategies to optimize the capital structure and maximize shareholder value.

This article, the first in the series, describes how to estimate the weighted average cost of capital (WACC) and the issues that need to be considered when doing so.

If companies were entirely financed with equity, there would be little difficulty in determining its cost of capital: it would be the expected return required by shareholders. Most companies, however, are not wholly financed with equity. They tend to issue a variety of financing instruments, including debt, equity and hybrids. Due to this financing mix, companies usually calculate a weighted average cost of capital (WACC).

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A valuable relationship

Zanders maintains partnerships with various suppliers of treasury management systems. One of the first partner companies with which Zanders established ties was SAP. Over the past decade Zanders built up a close relationship with this supplier of business software, a connection that is primarily characterised by mutual respect and trust.

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