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FIN351: lecture 6

FIN351: lecture 6

Weighted Average Cost of Capital (WACC)

If you invest in a stock, you require a an expected rate of return, or the cost of capital for the stock

If you invest in a bond, you require a an expected rate of return, or the cost of capital for the bond

Then, if you invest in a a portfolio of all the firm’s securities (debt and stock), what is the expected rate of return you require?

The expected rate of return on a portfolio of all the firm’s securities is called the weighted average cost of capital

(WACC). It is also called the expected return on the asset of the firm.

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