Commercial bank: accepts deposits from customers and makes consumer and commercial
loans using these deposits.
Investment bank: acts as an intermediary between companies and investors. Does not
accept deposits, but rather sells investments, advises on M&A, etc…loans and
debt/equity issues originated by the bank are not typically held by the bank, but rather
sold to third parties on the buy side through their sales and trading arms.
Meaning and formula of WACC
WACC – Weighted Average cost of capital – (ME/E+D Re) + (MD/E+D*Rd)*(1-t)
ME – Market Value of Equity
E – Equity
D – Debt
Re – Cost of equity
Rd – Cost of Debt
T – Tax rate
A company is typically financed using a combination of debt (bonds) and equity (stocks).
Because a company may receive more funding from one source than another, we
calculate a weighted average to find out how expensive it is for a company to raise the
funds needed to buy buildings, equipment, and inventory.
It’s important for a company to know its weighted average cost of capital to gauge the
expense of funding future projects. The lower a company’s WACC, the cheaper it is for a
company to fund new projects.