Project help
First off, I am still not sure that this is the right forum section, so if its not, I apologize.
That being said, can someone please answer a question of mine? Im a college junior taking his first corporate finance class and some of the concepts are still not quite sticking with me. What does it mean if the WACC is smaller than the growth rate? if a company's WACC is 1% and the Growth is 3%, will the company achieve the growth rate?
My current thinking is that since the WACC is at a lower % than that of the growth rate, then the company will be able to grow as it is able to cover its costs, is this the right thinking or am I forgetting something? I appreciate your help, and while I don't mind asking my teacher, he doesn't like answering emails, and sometimes, completely ignores them, so I need a source that is a little more reliable. So again, thank you.
bump
The WACC (weighted average cost of capital) is a measure of how much you have to pay for your financing. As you might already know, your cost of capital consists of two things; how much you have to pay for your debt (interest) and how much you have to pay for your equity (required return).
Growth is often a good thing, but it can be destructive/bad. What you seem to forget to take under consideration is the Return on Invested Capital (ROIC). If a company has a WACC that's lower than the ROIC, it will add value to the company when its revenues continue to grow. If, however, the WACC exceeds the ROIC, then the value of the company will decrease when it grows. Why? Because the company pays more for the capital that generates revenues than what it gets back.
So, consider WACC (a.k.a Cost of Capital) and ROIC when you evaluate whether growth is a good thing or not for your company.
thank you for your reply, however, I was wondering whether there was a direct correlation between the WACC and the growth rate? I remember my teacher saying something about the wacc being bigger/smaller than g, but i cannot remember it thanks again for your help.
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