WACC — Weighted Average Cost of Capital
WACC represents the average rate a company must pay to finance its assets, weighted by the proportion of debt and equity in its capital structure.
WACC Formula
WACC = (E/V × Re) + (D/V × Rd × (1-T))
Where:
- E = Market value of equity
- D = Market value of debt
- V = Total value (E+D)
- Re = Cost of equity
- Rd = Cost of debt
- T = Tax rate
Step-by-Step:
- 1
Calculate weights
E/V and D/V — proportion of equity and debt.
- 2
Find cost of equity
Use CAPM: Re = Rf + Beta × (Rm - Rf).
- 3
Find after-tax cost of debt
Rd × (1 - Tax Rate).
- 4
Apply formula
Weighted sum of equity and debt costs.
Worked Examples:
Company valuation
E: 60CrD: 40CrRe: 14%Rd: 9%T: 25%
Result: WACC = 11.1%
E/V=0.6, D/V=0.4. WACC = 0.6×14% + 0.4×9%×0.75 = 8.4% + 2.7% = 11.1%