Weighted average cost of capital (WACC) is the average after-tax cost of a company’s various capital sources, including common stock, preferred stock, bonds, and any other long-term debt. In other words, WACC is the rate a company expects to pay on average to finance its assets. Since a company has two primary sources of financing – debt and equity – WACC is the average cost of raising that money.

Formula for WACC

WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight, and then adding the products together to determine the WACC value:

WACC =  x Re +  x Rd x (1 – Tc)

Where:

  • Re = cost of equity
  • Rd = cost of debt
  • E = market value of the firm’s equity
  • D = market value of the firm’s debt
  • V = E + D
  • E/V = percentage of financing that is equity
  • D/V = percentage of financing that is debt
  • Tc = corporate tax rate


Source : Investopedia