Weighted average cost of capital is termed as the rate which the stakeholders of the company expect from the company in terms of their return on the investments. The outside stakeholders determine it for the calculation of their average returns rather than management.
In the above case, the weighted average cost of capital is calculated by using the market value of the total debt, equity and the overall value of the Wesfarmers. Market value is preferred in its calculation, as it is closer to the expectations of the stakeholders. They find it more convenient to rely on the market values, which thereby help in raising the capital value of the company in the external market (Hofmann, 2014).
Market value of equity is taken from the market price of the shares of the Wesfarmers in the external market. Debt value also represents the indebtedness of the company. Cost of equity is calculated by the capital asset pricing model, which considers the risk free rate, beta and market return. It is better than the dividend growth model. However, the dividend growth model considers the growth factor, but it is not very reliable for the stakeholders (Hull, 2014). Beta is calculated with the help of the share prices of the company available on the web. Return on market is used rather than the spread between the return on market and risk free rate for calculation of cost of equity.