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Weighted Average Cost of Capital

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The Weighted Average Cost of Capital (WACC) is the calculation of a company's of capital where each type of capital (Common Stock, Bonds,Preferred Stock,etc.) is weighted proportionately, expressed as a percentage.

The equation for Weighted Average Cost of Capital (WACC) is as follows:

Image: WACC.png

Where:

Re= Cost of Equity

Rd= Cost of Debt

E= Market Value of Company's Equity

D= Market Value of Company'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

WACC is an average representing the expected return on all a company's Securities. WACC is often used to determine the overall required return or hurdle rate for the company as a whole and as a result, is used by management to determine the economic feasibility of new projects or developments for the company. For example, a company with a WACC of 11% should only accept new projects/investments that give a return higher than 11%.

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