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. A company has two primary sources of financing - debt and equity - and, in simple terms, WACC is the average cost of raising that capital.
In other words, it is the average rate of return (ROR) that is expected by lenders and shareholders who provide capital to a business.
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 as seen in the WACC calculation formula:
Reference: https://www.investopedia.com/ask/answers/063014/what-formula-calculating-weighted-average-cost-capital-wacc.asp
In other words, it is the average rate of return (ROR) that is expected by lenders and shareholders who provide capital to a business.
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 as seen in the WACC calculation formula:
For example, a firm's financial data shows the following:
(E) Equity = $8,000
(D) Debt = $2,000
(Re) Equity profit sharing/stockholder payment rate = 12.5%
(Rd) Interest rate on the debt = 6%
(t) Tax rate = 30%
To find WACC, enter the values into the equation and solve:
WACC = [[(8000/10000) x 0.125] + [(2000/10000) * 0.06 * (1 - 0.3)]]
WACC = [0.1 + .0084] = 0.1084 or 10.84%
And so the weighted average cost of capital for this firm is 10.84%.
(E) Equity = $8,000
(D) Debt = $2,000
(Re) Equity profit sharing/stockholder payment rate = 12.5%
(Rd) Interest rate on the debt = 6%
(t) Tax rate = 30%
To find WACC, enter the values into the equation and solve:
WACC = [[(8000/10000) x 0.125] + [(2000/10000) * 0.06 * (1 - 0.3)]]
WACC = [0.1 + .0084] = 0.1084 or 10.84%
And so the weighted average cost of capital for this firm is 10.84%.
