What sources of capital should be included when you estimate XYZ’s WACC?  Should the component costs be estimated on a before or after-tax basis? Why?

When estimating XYZ’s WACC (weighted average cost of capital), it is important to include all sources of funding that the company has access to – such as equity, debt and preferred shares. Each of these sources will come with different costs that must be considered when calculating the overall WACC.

Idealy, the costs of each component should be calculated after tax as it provides a better representation of what is needed to finance an activity. It is because taxes reduce available funds for investment, and thus make estimates made before tax less accurate when attempting to accurately estimate how much would be needed in a given situation.

In addition, using numbers after tax ensures that all benefits related to taxes (such as credit or debits) are also taken into account. Overall results will be more accurate. Ultimately then, while both approaches have their place within financial analysis, utilizing post tax figures yields better results when attempting estimate XYZ’s WACC – thereby allowing company make more informed decisions moving forward.