25 September 2009
A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else help equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.
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A way to calculate the cost of a company's equity that gives different weight to different aspects of the equities. Instead of lumping retained earnings, common stock, and preferred stock together, WACE provides a more accurate idea of a companies total cost of equity. Determining an accurate cost of equity for a firm is integral for the firm to be able to calculate its cost of capital.
In turn, an accurate measure of the cost of capital is essential when a firm is trying to decide if a future project will be profitable or not.The amount that a company earns on the total investment it has made in its business. Total gross invested capital is equal to all of the shareholders' equity (both common and preferred shares) plus the total gross debt that the company has accumulated before making any payments on the debt.
A calculation used, either by a firm or investors, to determine the amount of return that a firm could earn on additional contributed capital. The calculation measures the return generated when a company converts its capital into capital expenditures, which generate revenues from core operations. A higher RONIC equates to a relatively efficient firm.
A mortgage refinancing situation in which the lender pays the borrower's loan settlement costs and then extends a new mortgage loan. A lender does this in exchange for charging the borrower a higher interest rate. When the lender then sells this mortgage into the secondary mortgage market, the price it will receive for the mortgage is based on the interest rate on the mortgage. A mortgage broker would do the same based on the size of the rebate they might receive from a lender.