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%

RELATED TERMS
  1. Cost Of Equity

    In financial theory, the return that stockholders require for ...
  2. Stockholders' Equity

    The portion of the balance sheet that represents the capital ...
  3. Cost Of Capital

    The required return necessary to make a capital budgeting project, ...
  4. Composite Cost Of Capital

    A company's cost to borrow money given the proportional amounts ...
  5. Junior Equity

    Junior equity refers to equity that ranks lower than some other ...
  6. Capital Stock

    The common and preferred stock a company is authorized to issue, ...
Related Articles
  1. Markets

    Cost of Equity

    The cost of equity is the rate of return an investor requires from a stock before exploring other opportunities.
  2. Investing

    Evaluating Retained Earnings: What Gets Kept Counts

    A company's retained earnings matter. Be investment-savvy and learn how to analyze this often overlooked information.
  3. Investing

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  4. Markets

    Equity Multiplier

    The equity multiplier is a straightforward ratio used to measure a company’s financial leverage. The ratio is calculated by dividing total assets by total equity.
  5. Managing Wealth

    Know Your Stock Cost Basis

    Understanding equity cost basis is critical for tracking the gains or losses of an investment.
  6. Investing

    What Is Stockholders' Equity?

    Stockholders’ equity represents the equity that shareholders own in a company.
  7. Investing

    Explaining Market Value of Equity

    Market value of equity is the total value of all the outstanding stock as measured in the stock market at a particular time.
  8. Investing

    Calculating the Equity Risk Premium

    Equity risk premium is the excess expected return of a stock, or the stock market as a whole, over the risk-free rate.
  9. Investing

    A Primer On Preferred Stocks

    Offering both income and relative security, these uncommon shares may work for you.
  10. Investing

    Valuing A Company Using The Residual Income Method

    Residual income is the income a company generates after accounting for the true cost of its capital, which is the cost of funds it uses to finance its business.
RELATED FAQS
  1. What is the difference between a company's equity and its shareholders' equity?

    Understand the difference and the interrelationship between shareholders' equity in a company and the company's actual total ... Read Answer >>
  2. How do you calculate the proper weights of different costs of capital?

    Understand how to calculate the weights of the difference costs of capital and how this calculation is used to determine ... Read Answer >>
  3. 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 >>
  4. What is the difference between cost of equity and cost of capital?

    Read about some of the differences between a company's cost of equity and its cost of capital, two measures of its required ... Read Answer >>
  5. What is the difference between market capitalization and equity?

    Understand the difference between market capitalization and equity, two primary measurements used to evaluate the worth of ... Read Answer >>
  6. What is the difference between the equity market and the stock market?

    Discover the basic information about the equity, or stock, market and the two primary classifications of equities that are ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center