Weighted Average Cost of Capital (WACC)
The weighted average cost of capital (WACC) is a business’s rate that it pays to finance its assets. The WACC formula uses a company’s equity and debts to determine its cost of capital, and this metric is used by investment firms and financing providers to evaluate the rate of return on acquiring or funding a business.
To calculate WACC, use the following formula:
WACC = (E/V x Re) + ((D/V x Rd) x (1 – T))
Where:
E = market value of the firm’s equity (market cap)
D = market value of the firm’s debt
V = total value of capital (equity plus debt)
E/V = percentage of capital that is equity
D/V = percentage of capital that is debt
Re = cost of equity (required rate of return)
Rd = cost of debt (yield to maturity on existing debt)
T = tax rate
