Have you ever wondered why some investment projects seem attractive even with seemingly high returns, while others are not worth it?

The secret lies in understanding the total cost of financing, not just the expected returns.

Many investors tend to focus only on the return figures, but they forget that the cost of capital is equally important.
Whether it's interest from borrowing or the expected return of shareholders, both affect investment decisions.
And this is where WACC, or Weighted Average Cost of Capital, comes into play.

WACC is the weighted average of all the capital costs a company uses to operate.
It tells you how much it costs to raise money for investment, including both the cost of debt and the return expected by shareholders.

For example, if a company has a mix of debt and equity, the interest paid to banks will be lower than the return shareholders expect because borrowing is less risky.
That's why we need to weight these costs; the cost of debt is part of the overall picture, not the whole story.

The formula to calculate WACC isn't complicated: WACC = (D/V) × Rd × (1-Tc) + (E/V) × Re
Here, D/V is the proportion of debt to total capital, Rd is the cost of debt or interest rate, Tc is the tax rate, E/V is the proportion of equity, and Re is the expected return.

Let's look at a real example:
Suppose a company has 100 million baht in debt and 160 million baht in equity.
The interest rate on the debt is 7% per year, which is the cost of debt, and the corporate tax rate is 20%.
The expected return is 15%.

Plugging these into the formula, WACC comes out to approximately 11.38%, meaning the average cost of capital for this company is 11.38% per year.

Compare that to the expected return of 15%, which is higher than WACC.
This indicates that the project is worth investing in because the return covers the cost of raising funds and still leaves a surplus.

The lower the WACC, the better, because it means the company can raise capital more cheaply.
But investment decisions shouldn't be based solely on WACC; other factors like project risk, industry conditions, and overall economic environment must also be considered.

One thing to watch out for is that the cost of debt can change if market interest rates fluctuate.
The company's borrowing costs will adjust accordingly.
Also, WACC doesn't account for the risk profile of individual projects; it's just an estimate based on the current capital structure.

To use WACC effectively, it should be combined with other metrics like NPV (Net Present Value) and IRR (Internal Rate of Return).
Regular updates to calculations are necessary to keep information current.
And remember, the cost of debt is just part of the overall picture, not the whole story.

In summary, WACC is a useful tool for evaluating investment profitability, but it must be used carefully.
Consider all aspects of decision-making, and keep in mind that the cost of debt is only one component of the calculation.
The key is to look at the overall picture.