You have a new subscriber! Very helpful video, I've understand wacc but this video was so clear. I have only one question, if Wacc is my expected return as an investor, if I have a wacc of 7% for example, I'm aspiring to have a 7% CAGR? Or this will be my expected return for (10 years e.g.) of my investment? And in other way, if I try to make a 15% CAGR of my investment, I need to choose this discount rate instead of wacc? Thanks in advance, greetings from Argentina.
Thank you, this is very clear! So a higher leveraged company would have a higher enterprise value due to a relatively lower WACC? As you mentioned the cost of Equity usually higher than the cost of Debt.
@yixuanniu5482 In theory, up to a certain point yes. But there is an “optimal capital structure” where the debt to equity mix produces the lowest WACC and therefore the highest enterprise value. For example, once you start to take on TOO MUCH debt, the company becomes distressed, and it becomes more expensive to borrow from new lenders because they’re worried you might not be able to service the debt. Your equity also becomes more expensive because new investors don’t want to invest in your equity if they are worried that you will go bankrupt. So at that point having too much debt drives up both your cost of debt AND cost of equity, increasing your WACC. Hope that helps!
You have a new subscriber! Very helpful video, I've understand wacc but this video was so clear. I have only one question, if Wacc is my expected return as an investor, if I have a wacc of 7% for example, I'm aspiring to have a 7% CAGR? Or this will be my expected return for (10 years e.g.) of my investment? And in other way, if I try to make a 15% CAGR of my investment, I need to choose this discount rate instead of wacc? Thanks in advance, greetings from Argentina.
Amazingly well!
Thank you, this is very clear! So a higher leveraged company would have a higher enterprise value due to a relatively lower WACC? As you mentioned the cost of Equity usually higher than the cost of Debt.
@yixuanniu5482 In theory, up to a certain point yes. But there is an “optimal capital structure” where the debt to equity mix produces the lowest WACC and therefore the highest enterprise value.
For example, once you start to take on TOO MUCH debt, the company becomes distressed, and it becomes more expensive to borrow from new lenders because they’re worried you might not be able to service the debt.
Your equity also becomes more expensive because new investors don’t want to invest in your equity if they are worried that you will go bankrupt. So at that point having too much debt drives up both your cost of debt AND cost of equity, increasing your WACC.
Hope that helps!
If you have any questions or feedback, feel free to comment below or reach out to me on Instagram (@WallStreetMastermind)!