Calculate the overall cost of capital that a company incurs for both debt and equity financing.
Weighted Average Cost of Capital (WACC) is a financial metric that calculates a company’s overall cost of capital, combining both debt and equity financing. It's commonly used by analysts and investors to assess the valuation and financial health of companies.
The formula to calculate WACC is:
WACC = (E/V * Re) + ((D/V * Rd) * (1 - Tc))
Where:
Let’s assume the following values for a company:
Using the WACC formula, we can calculate the WACC as:
WACC = (1,000,000 / 1,500,000 * 8%) + ((500,000 / 1,500,000 * 5%) * (1 - 0.21)) = 6.09%