Weighted average cost of capital (WACC) is the average aftertax cost of a company’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 = * Re + * 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
 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 =[( * 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 stock analysis tools to find a company's WACC.

What is the formula for calculating weighted average cost of capital (WACC) in Excel?
When analyzing different financing options, companies need to look at how much it will cost to fund operations. There are ... Read Full Answer >> 
How do I use the CAPM (capital asset pricing model) to determine the cost of equity?
In capital budgeting, corporate accountants and finance analysts often use the capital asset pricing model, or CAPM, to estimate ... Read Full Answer >> 
How do you calculate the proper weights of different costs of capital?
To fund operations, all businesses must raise money, called capital. Generally, capital comes from two sources: investors ... Read Full Answer >> 
Can working capital be depreciated?
Working capital as current assets cannot be depreciated the way longterm, fixed assets are. In accounting, depreciation ... Read Full Answer >> 
What does high working capital say about a company's financial prospects?
If a company has high working capital, it has more than enough liquid funds to meet its shortterm obligations. Working capital, ... Read Full Answer >> 
How can working capital affect a company's finances?
Working capital, or total current assets minus total current liabilities, can affect a company's longerterm investment effectiveness ... Read Full Answer >>

Fundamental Analysis
How To Decode A Company's Earnings Reports
Read between the lines to decipher a company's true financial condition. 
Investing Basics
Useful Balance Sheet Metrics
These metrics can help you better understand the information found on balance sheets. 
Markets
How To Pick A Stock
So you've finally decided to start investing. But what should you put in your portfolio? Find out here. 
Forex Education
6 Basic Financial Ratios And What They Reveal
These formulas can help you pick better stocks for your portfolio once you learn how to use them. 
Forex Education
5 Tips For Reading A Balance Sheet
The balance sheet, along with the income and cash flow statements, is an important tool for investors to gain insight into a company and its operations. 
Active Trading
An Introduction To Depreciation
Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line. 
Markets
Operating Cash Flow: Better Than Net Income?
Differences between accrual accounting and cash flows show why net income is easier to manipulate. 
Investing Basics
The Best Litmus Test Of A Company's Risk? The Acid Test
The acid test measures a company’s shortterm liquidity. 
Investing Basics
Understanding Liquidity Risk
Learn about the two types of liquidity risk: funding liquidity risk and market liquidity risk. 
Investing Basics
Explaining Financial Statement Analysis
Financial statement analysis is the process of reviewing a company’s statements to gain an understanding of its financial health.

Interest Coverage Ratio
A debt ratio and profitability ratio used to determine how easily ... 
Receivables Turnover Ratio
An accounting measure used to quantify a firm's effectiveness ... 
Balance Sheet
A financial statement that summarizes a company's assets, liabilities ... 
Equity
Equity is the value of an asset less the value of all liabilities ... 
Current Assets
A balance sheet account that represents the value of all assets ... 
AcidTest Ratio
A stringent indicator that indicates whether a firm has sufficient ...