Weighted Average Cost Of Capital Example

Waccis an important input in capital budgeting and business valuation.

Weighted average cost of capital example. Here is the basic formula to calculate for weighted average cost of capital wacc. The weighted average cost of capital wacc is a financial ratio that calculates a company s cost of financing and acquiring assets by comparing the debt and equity structure of the business. It is calculated by weighing the cost of equity and the after tax cost of debt by their relative weights in the capital structure. It is the composite rate of return required by shareholders and debt holders for financing new investments of the company.

The weighted average cost of capital using the above formula can be calculated as follows. The 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. Wacc e v r e d v r d 1 t e market value of the company s equity d market value of the company s debt v total of the r. Read capital assets pricing models.

Calculating the weighted average cost of capital once you have calculated the cost of capital for all the sources of debt and equity and gathered the other information needed you can calculate the wacc. It is different from the average cost of capital which is based on the cost of equity and debt already issued. Weighted average cost of capital wacc is the average after tax cost of a company s various capital sources used to finance the company. All sources of capital including common.

Overview formula example the total capital of the company is the sum of the values of its common shares preference shares and debt instruments ve vp vd. Wacc e v x re d v x rd x 1 t let s look at an example. The weighted average cost of capital wacc is the minimum return a company must earn on its projects. The ratio of debt to equity in a company is used to determine which source should be utilized to fund new purchases.