Weighted average cost of capital, also known as WACC in short is the company's cost of capital where every section of the company's investments is weighted proportionally. The WACC includes bonds, stocks etc.The formula to calculate weighted average cost of capital can be calculated with the help of this below formula:where,
E = Market Value of Company's Equity
Re = Cost of Equity
D = Market Value of Firm's Debt
Rd = Cost of Debt
Tc = Corporate Tax RateLet us learn to weighted average cost of capital better with this following example:Example:
Company PQR wants to raise $50,000 for purchasing the machines and tools to improve its business. The company releases 400 shares of $60 each. As the shareholders expects 4% (cost of equity) on the investment. The company later releases 100 bonds at $260 each and the investors expect 6% (cost of debt) return. The corporate tax rate is given to be 25%. Calculate weighted average cost of capital.Solution:
Given: Market Value of Company's Equity(E) = $24,000
Cost of Equity (Re) = 4%
Market Value of Firm's Debt (D) = $26,000
Cost of Debt (Rd) = 6%
Corporate Tax Rate (Tc) = 25%
As we've got all the required data, let us input these values onto WACC formula,
We know the formula to calculate WACC = E/V x Re + D/V x Rd x (1 - Tc)
= ((24,000/50,000) x 0.04) + [((26,000/50,000) x .06) x (1-0.25))]
= 0.0426 x 100 (Multiplying with 100 to turn the value into percentage)
= 4.26%Hence, weighted average cost of capital (WACC) for the company PQR = 4.26%
Enter the required values in the below online WACC calculator and then click calculate button to find the output.
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