WMCC schedules present the correlation between new sources of financing and a company’s weighted average cost of capital. There are four steps to determine the WMCC schedule.
Firstly, it is necessary to estimate the cost of each source of financing at various levels taking into account current market conditions and the assessment of expectations of investors and lenders.
Secondly, the breakpoints should be found with the help of the formula explained before, BP = AF/W. By calculating the cost of each source of investments in its correlation to the firm’s capital structure, the results show the weighted average cost reflecting the interrelationship of financing decisions.
Generally, the peculiar feature of WACC is to increase when the firm looks for more and more capital. With providing more capital, the rate of return is expected to rise too. The WACC demonstrates the lowest level of return available from the financing source, taking into account the correspondence to the financial obligations such as interest payments, dividends, debt. The calculation of the WACC is based on cash flows. The WACC calculation is made on an after-tax basis. The last step is to create a WMCC schedule demonstrating the WACC for every component at any level of new financing.
The company may create the investment opportunities schedule presented as a graph from the highest returns to the lowest ones. Combining WMCC and IOS, the company may make investment decisions. The companies invest in those projects which are up to the point where WMCC is equal to IOS.
All projects that are on the left to the point where WMCC = IOS guarantee profits for shareholders, and all projects that are on the right from this point reduce their return. Most companies stop the process of financing before the equalization of WMCC and the marginal return from investment.