Weighted average cost of capital (WACC) is the average aftertax cost of a companyâ€™s various capital sources, including common stock, preferred stock, bonds, and any other longterm debt. A company has two primary sources of financing  debt and equity  and, in simple terms, WACC is the average cost of raising that money. WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight, and then adding the products together to determine the WACC value:
WACC = x Re + x Rd x (1 â€“ Tc)
Where:
 Re = cost of equity
 Rd = cost of debt
 E = market value of the firmâ€™s equity
 D = market value of the firmâ€™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
When calculating a firm's WACC, the first step is to determine what proportion of a firm is financed by equity and what proportion is financed by debt by entering the appropriate values into the and components of the equation. Next, the proportion of equity () is multiplied by the cost of equity (Re); and the proportion of debt () is multiplied by the cost of debt (Rd).
The debt side of the equation (* Rd) is then multiplied by (1  Tc) to get the aftertax cost of debt (there is a tax shield associated with interest). The final step is to add the equity side of the equation to the debt side of the equation to determine WACC.
For example, a firm's financial data shows the following:
 Equity = $8,000
 Debt = $2,000
 Re = 12.5%
 Rd = 6%
 Tax rate = 30%
To find WACC, enter the values into the equation and solve:
WACC =[( x 0.125)] + [( * 0.06 * (1  0.3)]
WACC = 0.1 + .0084 = 0.1084 or 10.84%; the WACC for this firm then is 10.84%.
Because the calculation takes time, most investors use online analysis tools to find a company's WACC.

What does a high weighted average cost of capital (WACC) signify?
Find out what it means for a company to have a relatively high weighted average cost of capital, or WACC, and why this is ... Read Answer >> 
What is the formula for calculating weighted average cost of capital (WACC) in Excel?
Learn about the weighted average cost of capital (WACC) formula and how it is used to estimate the average cost of raising ... Read Answer >> 
How do interest rates affect the weighted average cost of capital (WACC) calculation?
The interest rate is one of many external factors that can change the inputs in the weighted average cost of capital (WACC) ... Read Answer >> 
How do you calculate the ratio between debt and equity in the cost of capital
Discover how to calculate the ratio between debt and equity when making cost of capital estimations using the weighted average ... Read Answer >> 
Do companies measure their cost of debt with before or aftertax returns?
Understand the before and aftertax calculations of cost of debt capital and how each is useful in deciding between funding ... Read Answer >> 
What are the benefits and shortfalls of the HerfindahlHirschman Index?
Learn about the differences between equity and debt financing and how they impact financials. Find out how businesses determine ... Read Answer >>

Investing
Investors Need A Good WACC
Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality. 
Managing Wealth
Weighted Average Cost Of Capital (WACC)
Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality 
Personal Finance
Top Things To Know For An Investment Banking Interview
Without some basic knowledge, you won't get the job. Find out what you need to know and how to prepare. 
Small Business
Explaining Cost Of Capital
Cost of capital is the cost of funds used to finance a business. 
Investing
Target Corp: WACC Analysis (TGT)
Learn about the importance of capital structure when making investment decisions, and how Target's capital structure compares against the rest of the industry. 
Investing
How to Calculate Required Rate of Return
The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it. 
Investing
DCF Valuation: The Stock Market Sanity Check
Calculate whether the market is paying too much for a particular stock.

Weighted Average Cost Of Capital  WACC
Weighted average cost of capital (WACC) is a calculation of a ... 
Cost Of Capital
The required return necessary to make a capital budgeting project, ... 
Return On New Invested Capital  RONIC
A calculation used, either by a firm or investors, to determine ... 
Economic Spread
1. A performance metric that is equal to the difference between ... 
Cost of Debt
The effective rate that a company pays on its current debt. This ... 
Traditional Theory Of Capital Structure
The theory that when the Weighted Average Cost of Capital (WACC) ...