I just came across an interesting issue regarding investment valuation. Many people tend to only look at the expected returns, but forget that the cost of capital used for investment is equally important.

This is where WACC comes in, which, simply put, is the average cost of capital that a company must use to operate, whether it's bank loans or equity funding.

Why focus on WACC? Because it tells us how much it truly costs to raise funds for business operations. If the expected return exceeds WACC, the project is worth investing in. If it's less, then it's not worthwhile.

WACC consists of two main parts: the first is the cost of debt (the interest rate the company must pay), and the second is the cost of equity (the return that shareholders expect).

The formula for calculating WACC looks complex but isn't really difficult. The formula is WACC = (D/V × Rd × (1-Tc)) + (E/V × Re), where D/V is the debt ratio, Rd is the cost of debt, Tc is the tax rate, E/V is the equity ratio, and Re is the cost of equity.

Let's look at an example. Suppose company XYZ has debt of 100 million baht (60% of total capital) and equity of 160 million baht (40%). The loan interest rate is 7% per year, the tax rate is 20%, and the expected return is 15%. Plugging these into the WACC formula gives approximately 11.38%, which is lower than the expected return, so this project is worth investing in.

A lower WACC is better because it means the company can raise funds at a cheaper cost. But other factors should also be considered, such as industry type, project risk, and the company's investment policy.

However, be cautious: WACC has some limitations. It doesn't account for future changes, only considers investment risk alone, and calculating it can be quite complex. It requires current data on capital structure. Also, WACC is only an estimate because factors like interest rates and risk can change over time.

The best approach is to use WACC together with other financial metrics like Net Present Value (NPV) and Internal Rate of Return (IRR) to get a clearer overall picture. And don't forget to update the WACC calculation regularly to reflect market changes.

In summary, WACC is a useful tool for investment valuation, but it should be used carefully and in conjunction with other factors to make the best investment decisions.