CALCULATION OF AVERAGE WEIGHTED COSTS OF CAPITAL WHEN ASSESSING COMPANY BUSINESS ACTIVITIES

Discount cash flows and economic profit are key criteria for business assessment. They can be used to develop efficient business strategies. Discount cash flows take into account all factors influencing the company value. They give information on future cash flows at the risk rate typical of cash flows. When determining discount cash flows for calculating average weighted costs of capital, a method for calculating average weighted costs based on a contribution of a single cash source to total capital and cost values can be used. Values of average weighted costs of capital can change depending on the structure of investment resources, revenues and profitability. These costs of capital are referred to as marginal. Economic profit can be a measure of costs generated in a singular period. It transforms key cost factors into a uniform cost factor which describes results of company business activities, i.e. economic value added. Average weighted costs of capital can be calculated by three methods. The first one is based on use of the finance theory law according to which solvency changes result in changing owned and debt capital structures. The second one involves calculation of average weighted costs of capital using real solvency and unchangeable costs of owned and debt capital. The third one involves calculation of average weighted costs of capital using a target solvency ratio disregarding calculated solvency ratios. Different calculation methods for average weighted costs of capital produce different business values depending on goals of business appraisers. (c) 2018 Published by Future Academy www.FutureAcademy.org.UK