What does calculating the weighed average cost of capitol tell you about Foust Company's financial strategy including the level of risk involved in the business? How could the company use WACC calculations in determining future investments?
You did not provide any specific data on the Foust Company's levels of debt or equity or any required/expected rates of return on debt and/or equity.
That said, I suggest you google WACC; Wikipedia has a pretty good explanation of the weighted cost of capital.
The weighted average cost of capital (WACC) is a financial metric used to evaluate a company's financial strategy and assess the level of risk involved in its business operations. It represents the average cost of financing the company's assets, taking into account the proportional weights of debt and equity.
To calculate WACC, you need to determine the individual costs of debt and equity, as well as their respective proportions in the company's capital structure. The cost of debt is typically based on the interest rate paid on loans or bonds, while the cost of equity is the expected rate of return demanded by investors. The weights are the proportions of debt and equity in the company's total capital.
Once you have calculated the WACC, it can provide several insights into Foust Company's financial strategy and the associated risk:
1. Cost of Capital: WACC helps you understand the overall cost incurred by the company to finance its operations. A higher WACC indicates a higher cost of capital, which can affect profitability and financial viability.
2. Capital Structure: By considering the proportions of debt and equity within the WACC calculation, you can assess the company's capital structure. A higher proportion of debt in the capital structure implies higher financial risk and increased reliance on borrowing.
3. Investment Decisions: WACC can be utilized as a hurdle rate for evaluating potential investments. By comparing the expected return on an investment project to the WACC, Foust Company can determine whether the project is feasible or if it meets the necessary return expectations.
4. Risk Assessment: WACC serves as an indicator of the level of risk associated with the company's operations. A higher WACC suggests a greater risk due to the higher cost of capital or a weaker financial position, while a lower WACC implies lower risk due to lower financing costs or stronger financials.
It is important to note that the specific values and inputs used in WACC calculations, such as debt and equity levels, expected rates of return, and market conditions, will significantly influence the resulting insights and the company's decision-making process.
Please note that without specific data on Foust Company's capital structure, debt, equity, and expected returns, it is challenging to provide a detailed analysis of its financial strategy and risk level. I recommend consulting financial statements, market data, or seeking professional advice to obtain accurate information to perform a comprehensive WACC calculation.