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Overall Cost of Capital Formula

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Overall Cost of Capital is a model, which makes it a vital concept, especially for finance professionals in business development and investment banking. Check FAQs

OCC = \frac{E}{E + MV} \cdot RR + \frac{MV}{E + MV} \cdot R d \cdot (1 - T r)

OCC - Overall Cost of Capital?E - Market Value of the Firm’s Equity?MV - Market Value of the Firm’s Debt?RR - Required Rate of Return?R_d - Cost of Debt?T_r - Tax Rate?

Overall Cost of Capital Example

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Here is how the Overall Cost of Capital equation looks like with Values.

Here is how the Overall Cost of Capital equation looks like with Units.

Here is how the Overall Cost of Capital equation looks like.

53.7288 = \frac{500}{500 + 2100} \cdot 0.09 + \frac{2100}{500 + 2100} \cdot 95 \cdot (1 - 0.3)

53.7288 = \frac{500}{500 + 2100} \cdot 0.09 + \frac{2100}{500 + 2100} \cdot 95 \cdot (1 - 0.3)

53.7288 = \frac{500}{500 + 2100} \cdot 0.09 + \frac{2100}{500 + 2100} \cdot 95 \cdot (1 - 0.3)

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Overall Cost of Capital Solution

Follow our step by step solution on how to calculate Overall Cost of Capital?

FIRST Step Consider the formula

OCC = \frac{E}{E + MV} \cdot RR + \frac{MV}{E + MV} \cdot R d \cdot (1 - T r)

Next Step Substitute values of Variables

∴

OCC = \frac{500}{500 + 2100} \cdot 0.09 + \frac{2100}{500 + 2100} \cdot 95 \cdot (1 - 0.3)

Next Step Prepare to Evaluate

∴

OCC = \frac{500}{500 + 2100} \cdot 0.09 + \frac{2100}{500 + 2100} \cdot 95 \cdot (1 - 0.3)

Next Step Evaluate

∴

OCC = 53.7288461538461

LAST Step Rounding Answer

∴

OCC = 53.7288

Overall Cost of Capital Formula Elements

Variables

Overall Cost of Capital

Overall Cost of Capital is a model, which makes it a vital concept, especially for finance professionals in business development and investment banking.

Symbol: OCC

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Overall Cost of Capital

Market Value of the Firm’s Equity

Market Value of the Firm’s Equity is the total dollar market value of all of a company's outstanding shares.

Symbol: E

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Market Value of the Firm’s Equity

Market Value of the Firm’s Debt

The Market Value of the Firm’s Debt is the total dollar debt value of all of a firm such as bonds and loans.

Symbol: MV

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Market Value of the Firm’s Debt

Required Rate of Return

Required Rate of Return is the minimum return an investor expects for taking on the risk of investing in a particular asset, such as stocks or bonds.

Symbol: RR

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Required Rate of Return

Cost of Debt

Cost of Debt is the effective interest rate a company pays on its debt.

Symbol: R_d

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Cost of Debt

Tax Rate

Tax Rate refers to the percentage at which a taxpayer's income or the value of a good or service is taxed.

Symbol: T_r

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Tax Rate

Other formulas in Capital Budgeting category

Go Payback Period

PBP = \frac{Initial Invt}{C f}

Go Cost of Retained Earnings

C RE = (\frac{D}{P c}) + g

Go Cost of Debt

R d = Int.E \cdot (1 - T r)

Go After-Tax Cost of Debt

ATCD = (R f + CS P) \cdot (1 - T r)

How to Evaluate Overall Cost of Capital?

Overall Cost of Capital evaluator uses Overall Cost of Capital = (Market Value of the Firm’s Equity)/(Market Value of the Firm’s Equity+Market Value of the Firm’s Debt)*Required Rate of Return+(Market Value of the Firm’s Debt)/(Market Value of the Firm’s Equity+Market Value of the Firm’s Debt)*Cost of Debt*(1-Tax Rate) to evaluate the Overall Cost of Capital, The Overall Cost of Capital formula is defined as the average cost a company incurs to finance its operations through a mix of debt and equity. Overall Cost of Capital is denoted by OCC symbol.

How to evaluate Overall Cost of Capital using this online evaluator? To use this online evaluator for Overall Cost of Capital, enter Market Value of the Firm’s Equity (E), Market Value of the Firm’s Debt (MV), Required Rate of Return (RR), Cost of Debt (R_d) & Tax Rate (T_r) and hit the calculate button.

FAQs on Overall Cost of Capital

What is the formula to find Overall Cost of Capital?

The formula of Overall Cost of Capital is expressed as Overall Cost of Capital = (Market Value of the Firm’s Equity)/(Market Value of the Firm’s Equity+Market Value of the Firm’s Debt)*Required Rate of Return+(Market Value of the Firm’s Debt)/(Market Value of the Firm’s Equity+Market Value of the Firm’s Debt)*Cost of Debt*(1-Tax Rate). Here is an example- 53.72885 = (500)/(500+2100)*0.09+(2100)/(500+2100)*95*(1-0.3).

How to calculate Overall Cost of Capital?

With Market Value of the Firm’s Equity (E), Market Value of the Firm’s Debt (MV), Required Rate of Return (RR), Cost of Debt (R_d) & Tax Rate (T_r) we can find Overall Cost of Capital using the formula - Overall Cost of Capital = (Market Value of the Firm’s Equity)/(Market Value of the Firm’s Equity+Market Value of the Firm’s Debt)*Required Rate of Return+(Market Value of the Firm’s Debt)/(Market Value of the Firm’s Equity+Market Value of the Firm’s Debt)*Cost of Debt*(1-Tax Rate).

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Overall Cost of Capital Formula

Overall Cost of Capital Example

Overall Cost of Capital Solution

Overall Cost of Capital Formula Elements

Other formulas in Capital Budgeting category

How to Evaluate Overall Cost of Capital?

FAQs on Overall Cost of Capital

Variable Name