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I just wanted to share with you the latest WallStreetMojo Blog. Let me know what do you think.
WACC (Weighted Average Cost of Capital) | Step by Step Guide
Weighted average cost of capital is the average rate of return a company is expected to pay to all of its shareholders who; which includes, debt holders, equity shareholders and preferred equity shareholders; who have a different rate of return each because of the pecking order and hence the difference in weighted average cost of capital.
WACC Formula
Many investors don’t calculate WACC because it’s a little complex than the other financial ratios. But if you are one of those who would like to know how weighted average cost of capital (WACC) works, here’s the formula for you
WACC Formula = (E/V * Ke) + (D/V) * Kd * (1 – Tax rate)
- E = Market Value of Equity
- V = Total market value of equity & debt
- Ke = Cost of Equity
- D = Market Value of Debt
- Kd = Cost of Debt
- Tax Rate = Corporate Tax Rate
The equation may look complex, but as we learn each term, it will begin to make sense. Let’s begin.
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