Weighted Average Cost of Equity - WACE

DEFINITION of 'Weighted Average Cost of Equity - WACE'

A way to calculate the cost of a company's equity that gives different weight to different aspects of the equities. Instead of lumping retained earnings, common stock, and preferred stock together, WACE provides a more accurate idea of a companies total cost of equity. Determining an accurate cost of equity for a firm is integral for the firm to be able to calculate its cost of capital.

In turn, an accurate measure of the cost of capital is essential when a firm is trying to decide if a future project will be profitable or not.

BREAKING DOWN 'Weighted Average Cost of Equity - WACE'

Here is an example of how to calculate the WACE:

First, calculate the cost of new common stock, the cost of preferred stock and the cost of retained earnings. Lets assume we have already done this and the cost of common stock, preferred stock and retained earnings are 24%, 10% and 20% respectively.
Now, you must calculate the portion of total equity that is occupied by each form of equity. Again, lets assume this is 50%, 25% and 25%, for common stock, preferred stock and retained earnings respectively.
Finally, you multiply the cost of each form of equity by its respective portion of total equity and sum of the values - which results in the WACE. Our example results in a WACE of 19.5%.

WACE = (.24*.50) + (.10*.25) + (.20*.25) = 0.195 or 19.5%

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