Describe what is meant by the weighted-average number of common shares.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Describe what is meant by the weighted-average number of common shares.
Weighted average shares outstanding refers to the number of shares of a company calculated after adjusting for changes in the share capital over a reporting period. The number of shares of a company outstanding is not constant and may change at various times throughout the year, due to a share buyback, new issues, conversion, etc. The number of weighted average shares outstanding is used in calculating metrics such as Earnings per share (EPS) in order to provide a fair view of a company’s financial condition.
Suppose that Company XYZ Corporation has 500,000 shares at the beginning of its fiscal year. At the beginning of the second quarter, debenture holders of the company decided to convert their holdings into equity shares totaling 100,000 shares. At the beginning of the fourth quarter, the company buys back 50,000 shares with its cash surplus. Now, the shares outstanding at the end of the year stand at 500,000 + 100,000 – 50,000 = 550,000.
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