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Weighted Average Cost of Capital Formula

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The weighted average cost of capital (WACC) is the minimum return that a company is supposed to give on an average to satisfy its entire security proprietors to finance its assets. Check FAQs

WACC = ((\frac{E}{V Firm}) \cdot Re) + (((\frac{MV}{V Firm}) \cdot Rd) \cdot (1 - Tc))

WACC - Weighted average cost of capital?E - Market value of the firm’s equity?V_Firm - Firm Value?Re - Cost of Equity?MV - Market Value of the Firm’s Debt?Rd - Cost of Debt?Tc - Corporate Tax Rate?

Weighted Average Cost of Capital Example

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

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

Here is how the Weighted Average Cost of Capital equation looks like.

-160 = ((\frac{500}{500000}) \cdot 200000) + (((\frac{2000}{500000}) \cdot 10000) \cdot (1 - 10))

-160 = ((\frac{500}{500000}) \cdot 200000) + (((\frac{2000}{500000}) \cdot 10000) \cdot (1 - 10))

-160 = ((\frac{500}{500000}) \cdot 200000) + (((\frac{2000}{500000}) \cdot 10000) \cdot (1 - 10))

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Home » Financial » Business » Important Formulas of Business » Weighted Average Cost of Capital

Weighted Average Cost of Capital Solution

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

FIRST Step Consider the formula

WACC = ((\frac{E}{V Firm}) \cdot Re) + (((\frac{MV}{V Firm}) \cdot Rd) \cdot (1 - Tc))

Next Step Substitute values of Variables

∴

WACC = ((\frac{500}{500000}) \cdot 200000) + (((\frac{2000}{500000}) \cdot 10000) \cdot (1 - 10))

Next Step Prepare to Evaluate

∴

WACC = ((\frac{500}{500000}) \cdot 200000) + (((\frac{2000}{500000}) \cdot 10000) \cdot (1 - 10))

LAST Step Evaluate

∴

WACC = -160

Weighted Average Cost of Capital Formula Elements

Variables

Weighted average cost of capital

The weighted average cost of capital (WACC) is the minimum return that a company is supposed to give on an average to satisfy its entire security proprietors to finance its assets.

Symbol: WACC

Measurement: NAUnit: Unitless

Note: Value can be positive or negative.

Market value of the firm’s equity

The market value of equity is the total dollar market value of all of a company's outstanding shares.

Symbol: E

Measurement: NAUnit: Unitless

Note: Value can be positive or negative.

Firm Value

Firm Value is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization.

Symbol: V_Firm

Measurement: NAUnit: Unitless

Note: Value can be positive or negative.

Cost of Equity

The cost of equity is the return a firm theoretically pays to its equity investors, i.e., shareholders, to compensate for the risk they undertake by investing their capital.

Symbol: Re

Measurement: NAUnit: Unitless

Note: Value can be positive or negative.

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 can be positive or negative.

Cost of Debt

The cost of debt is the interest a company pays on its borrowings.

Symbol: Rd

Measurement: NAUnit: Unitless

Note: Value can be positive or negative.

Corporate Tax Rate

The corporate tax rate is the rate at which levy is placed on the profit of a firm to raise taxes.

Symbol: Tc

Measurement: NAUnit: Unitless

Note: Value can be positive or negative.

Credits

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Created by Team Softusvista

Softusvista Office (Pune), India

Team Softusvista has created this Formula and 600+ more formulas!

Verifier Image

Verified by Himanshi Sharma

Bhilai Institute of Technology (BIT), Raipur

Himanshi Sharma has verified this Formula and 800+ more formulas!

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How to Evaluate Weighted Average Cost of Capital?

Weighted Average Cost of Capital evaluator uses Weighted average cost of capital = ((Market value of the firm’s equity/Firm Value)*Cost of Equity)+(((Market Value of the Firm’s Debt/Firm Value)*Cost of Debt)*(1-Corporate Tax Rate)) to evaluate the Weighted average cost of capital, The Weighted Average Cost of Capital (WACC) is the minimum return that a company is supposed to give on average to satisfy its entire security proprietors to finance its assets. Weighted average cost of capital is denoted by WACC symbol.

How to evaluate Weighted Average Cost of Capital using this online evaluator? To use this online evaluator for Weighted Average Cost of Capital, enter Market value of the firm’s equity (E), Firm Value (V_Firm), Cost of Equity (Re), Market Value of the Firm’s Debt (MV), Cost of Debt (Rd) & Corporate Tax Rate (Tc) and hit the calculate button.

FAQs on Weighted Average Cost of Capital

What is the formula to find Weighted Average Cost of Capital?

The formula of Weighted Average Cost of Capital is expressed as Weighted average cost of capital = ((Market value of the firm’s equity/Firm Value)*Cost of Equity)+(((Market Value of the Firm’s Debt/Firm Value)*Cost of Debt)*(1-Corporate Tax Rate)). Here is an example- -160 = ((500/500000)*200000)+(((2000/500000)*10000)*(1-10)).

How to calculate Weighted Average Cost of Capital?

With Market value of the firm’s equity (E), Firm Value (V_Firm), Cost of Equity (Re), Market Value of the Firm’s Debt (MV), Cost of Debt (Rd) & Corporate Tax Rate (Tc) we can find Weighted Average Cost of Capital using the formula - Weighted average cost of capital = ((Market value of the firm’s equity/Firm Value)*Cost of Equity)+(((Market Value of the Firm’s Debt/Firm Value)*Cost of Debt)*(1-Corporate Tax Rate)).

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