How to Calculate WACC (Weighted Average Cost Of Capital)

Weighted Average Cost of Capital, or more simply referred to as WACC, is a calculation used to derive a firm’s cost of capital, in which each category of capital is weighed proportionately. Common stock, preferred stock, bonds, and any long-term debt are all included in the calculation of WACC. Everything else equal, a firm’s WACC increases as the beta and rate of return on equity increases. This is due to the fact that an increase in WACC notes a decrease in valuation, denoting a higher risk.

The following equation is used to calculate the firm’s WACC:

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=% of financing that is equity
D/V=% of financing that is debt
Tc=the corporate tax rate

Explanation of WACC

Typically, a firm’s assets are financed either by debt or by equity. WACC takes the average costs of any financing source, whereby each is weighted based on the given situation. By utilizing a weighted average, we can determine how much interest the firm must pay for every dollar that it finances.

WACC Calculator: http://www.kingcashcow.com/wacc-calculator/

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