In order to estimate the weighted average cost of capital we need to make certain assumptions. What are these assumptions and explain why we need to make them.

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For the calculation of WACC, you will need to assume:
1. This should take into consideration market expectations when the estimated rate of return for equity and debt is calculated. We need to assume that the market expectations at the time of assessment will be accurate in order for us to estimate WACC accurately.
2. The tax rate will remain the same throughout the WACC period. This includes changes in the corporate tax rate and any tax incentives offered by the government.
3. When calculating debt costs or leverage ratios, interest payments will be considered taxable income.
4. Capital structure should be optimal with respect to cost, risk, liquidity and control needs; these need to be considered when assessing WACC since capital structure has an impact on how much weight each financing source carries in calculating WACC and affects returns as well as risk associated with funding sources/mix of financiers used for particular projects/organization’s growth plans .

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