Calculate Weighted Average cost of Capital

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Weighted Average Cost of Capital Definition and Formula

WACCThe Weighted Average Cost of Capital is the calculation of the return a business has to pay per every penny being financed. Weighted Average Cost of capital takes into account the average of all the sources of finance being used by the business for the investment, it includes the cost of debt, cost of preference share capital and the cost of equity. The outcome of the Weighted Average Cost of Capital is the figure in the percentage that is the amount the business has to pay for the finance. Weighted Average Cost of Capital is calculated by the management of the business to determine the analysis or expected outcomes of particular project opportunities being opted by the businesses.

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These opportunities may include the simple investments in new projects, diversion in another industry, merger or an acquisition. All these investment plans need a cost of capital to be calculated prior the capital budgeting decision making.

Cost of Capital Formula

Given below is the formula for calculating weighted average cost of capital:

WACC = E/V * Re + D/V * Rd (1-Tc)

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

E/V = Percentage of equity financing

D/V = Percentage of Debt financing

Tc = Corporate tax rate