How do you calculate the weighted average cost of capital (WACC)?
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2 Answers
The weighted average cost of capital (WACC) is calculated using the formula WACC = (E/V) * Re + (D/V) * Rd * (1-T), where E is the market value of the company's equity, V is the market value of the company's total capital, Re is the cost of equity, D is the market value of the company's debt, Rd is the cost of debt, and T is the corporate tax rate.
The WACC is calculated by multiplying the cost of equity by the weight of equity and adding it to the cost of debt multiplied by the weight of debt. The weights used are typically the percentage of total capital represented by each component. Preferred stock and other sources of financing may also be included in the calculation. The resulting figure represents the minimum return that a company must earn on its investments to satisfy its various sources of financing.