ABSTRACT
The weighted average cost of capital (WACC) is helpful in capital budgeting decisions. It is used as a discounting rate in calculating the net present value (NPV) and internal rate of return (IRR) of a project and thus determines whether a company should go ahead with a project or not. Traditional theory is mix of net income approach and net operating income approach. It suggests that there is an optimal debt to equity ratio where the overall cost of capital is the minimum and market value of the firm is the maximum. Market timing theory states that companies time their equity issues in a way that they issue fresh stock when the stock prices are overvalued, and buy back shares when they are undervalued. The rational is that companies tend to take the course of least resistance, obtaining financing from sources that are readily available, and then steadily moving on to sources that may be more difficult to utilise.
