Weighted Average Cost Capital (WACC) and its Influence on the Changes in the Indicators Characteristic for Creating Value of a Company’s Capital
EleneKharabadze & MerabJikia
Significant changes were made to the understanding of the goals of a company’s development
during the last ten years (or even less for Georgia) and therefore, to the rules of evaluating the
achievement of the set objectives and the selection of specific indicators.
Nowadays, the concept of profit maximization, which is considered to be the main purpose of
business development in terms of market economy, is gradually replaced by the concept of value
maximization – Value Based Management (VBM). The latter is quite different compared to the
previous approach.In particular, this concept is focused on solving strategic
tasks.Traditionally,profit and profitability indicators have been considered to be the key
indicators of effectiveness, but due to a number of major reasons they do not always allow us to
discuss the value creation and in particular, its growth. Below are some of the most important of
these reasons:
• the possibility of making variations through accounting estimates;
• ignoring the factor of time value of money;
• ignoring the value of the own capital;
• exclusion of the risk factor and thedemanded return on the capital invested related to it
from the discussion.