Question

Discuss the factors that affect the WACC. Also discuss how these factors may differ somewhat from country to country.

Answer 1

Factors that effect the WACC:

• Some of them are within firms strategic control
• While others are external forces Outside the firms control

Internal factors :

Internal rate of return :

Important decision made by financial professionals in return to cost of capital revolves around the required rates of return of various projects.

Capital structure :

Refers to the way in which an organization finances operations

External factors :

Interest rates : primary tools of monetary policy

Inflation : refers to direct impact upon interest rate change

Market fluctuations : as market rises and falls cost of capital and market risk will unpredictably fluctuate

Corporate tax : tax implications have significant implications in the cost of capital

How these factors differs from country to country :

• By understanding various internal factors firms from different countries can have strategic control of capital cost and investment returns
• Each funding source comes from different cost and capital of different countries
• The external factors play outside the control of firms and they differ from country to country
• Fluctuations in market place are unpredictable and influence on overall risk and return for investors over the globe