Weighted Average Cost of Capital

The Weighted Average Cost of Capital (WACC) is the average rate of return a company is expected to pay its security holders to finance its Assets, weighted by the proportion of each source of Capital (Equity, debt, etc.). It represents the ultimate cost of Capital for the company, calculated as follows: WACC = (E/V x Re) + (D/V x Rd x (1-T)), where E is the market value of Equity, D is the market value of debt, V is the total market value of the company’s financing (E + D), Re is the Equity/">Cost of Equity, Rd is the Cost of Debt, and T is the corporate tax rate. For example, if a company has 70% Equity with a 10% return and 30% debt with a 5% return (with a 30% tax rate), its WACC would be calculated as: WACC = (0.7 x 0.10) + (0.3 x 0.05 x (1-0.30)) = 0.075 or 7.5%.