Weighted average cost of capital is the average rate that a company is expected to pay to security holders, investors and other creditors who have financed its assets. In other words, it is the rate of return that a stakeholder in a company expects to receive for its investment in the capital of the company.
As the name suggests, it is a weighted average of all the costs of the various sources of capital employed by the company. It is arrived at by assigning weights to each cost of capital. These weights may be based on book values or market values of debt and equity. The costs of equity and debt are then multiplied with their corresponding weights in the overall capital fund of the company. The sum of the weight adjusted costs is the weighted average cost of capital.
As Debt is a tax deductible, the cost of debt used in the formula is the post tax cost of capital.
The formula for calculating the weighted average cost of capital is
WACC = [ Ke * ( E / ( D + E )) ] + [ ( Kd * ( 1- t ) ) * ( D / ( D + E ))]
Ke = Cost of equity ; ; Kd = Pre tax Cost of debt ; t = Corporate tax rate ;
E = Total value of Equity ; D = Total value of Debt ;
In the calculator below insert the values of Cost of equity, Total value of equity, Cost of Debt, Total value of Debt and Corporate tax rate to arrive at the Weighted average cost of capital.