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 theÂ Â and Â 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)] + [(Â * 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.Â

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