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What is WACC of a Company?

WACC of a Comapny


WACC (Weighted Average Cost of Capital) of a company is a financial metric that represents the minimum return that the company must earn on its investments to satisfy its investors and creditors. It takes into account the cost of all forms of capital that the company uses to finance its operations, including debt and equity. WACC is calculated by weighting the cost of each type of capital by its proportion in the company's capital structure. A company's WACC is used as a discount rate to evaluate investment projects and capital budgeting decisions.


Weighted Average Cost of Capital is denoted by


Weighted Average Cost of Capital is generally denoted by its abbreviation "WACC".

Weighted Average Cost of Capital Formula



WACC = ((E/V) x Re) + ((D/V) x Rd x (1 - Tc))


where:


E = market value of the company's equity

D = market value of the company's debt

V = total market value of the company (E + D)

Re = cost of equity

Rd = cost of debt

Tc = corporate tax rate


The formula calculates the average cost of all the capital (debt and equity) that a company uses to finance its operations. It takes into account the relative proportion of debt and equity in the company's capital structure, as well as the cost of each type of capital. The result is a percentage that represents the minimum return that the company needs to earn on its investments to satisfy its investors and creditors.

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