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# WACC Weighted Cost of Capital

Weighted Average Cost of Capital (WACC) - Only Visible in Non Extended setup
Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted.

All sources of capital, including common stock, preferred stock, bonds and any other long-term debt, are included in a WACC calculation. A firms WACC increases as the beta and rate of return on equity increase, as an increase in WACC denotes a decrease in valuation and an increase in risk.

The method for calculating WACC can be expressed in the following formula:

Weighted Average Cost Of Capital (WACC)

((Cost of Equity (Re) X Total Equity) + ((Cost of Debt (Rd) X (1-Corporate tax rate (%)) X Total Debt)) / (Total Equity + Total Debt)

Explanation of Formula Elements

Cost of equity (Re) can be a bit tricky to calculate, since share capital does not technically have an explicit value. When companies pay debt, the amount they pay has a predetermined associated interest rate that debt depends on size and duration of the debt, though the value is relatively fixed. On the other hand, unlike debt, equity has no concrete price that the company must pay. Yet, that doesn't mean there is no cost of equity. Since shareholders will expect to receive a certain return on their investment in a company, the equity holders' required rate of return is a cost from the company's perspective, since if the company fails to deliver this expected return, shareholders will simply sell off their shares, which leads to a decrease in share price and in the company’s value. The cost of equity, then, is essentially the amount that a company must spend in order to maintain a share price that will satisfy its investors.

Calculating cost of debt (Rd), on the other hand, is a relatively straightforward process. To determine the cost of debt, use the market rate that a company is currently paying on its debt. If the company is paying a rate other than the market rate, you can estimate an appropriate market rate and substitute it in your calculations instead.

There are tax deductions available on interest paid, which is often to companies’ benefit. Because of this, the net cost of companies’ debt is the amount of interest they are paying, minus the amount they have saved in taxes as a result of their tax-deductible interest payments. This is why the after-tax cost of debt is Rd (1 - corporate tax rate).