What is WACC and how is it calculated?
WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight, and then adding the products together to determine the value.
In the above formula, E/V represents the proportion of equity-based financing, while D/V represents the proportion of debt-based financing.
How is wD calculated in WACC?
WACC = wD*rD *(1-t) + wP*rP + wE*rE
- w = the respective weight of debt, preferred stock/equity, and equity in the total capital structure.
- t = tax rate.
- D = cost of debt.
- P = cost of preferred stock/equity.
- E = cost of equity.
What is a typical WACC?
A high weighted average cost of capital, or WACC, is typically a signal of the higher risk associated with a firm’s operations. For example, a WACC of 3.7% means the company must pay its investors an average of $0.037 in return for every $1 in extra funding.
What is WACC and why is it important?
The weighted average cost of capital (WACC) is an important financial precept that is widely used in financial circles to test whether a return on investment can exceed or meet an asset, project, or company’s cost of invested capital (equity + debt).
What is the tax rate for WACC?
Notice in the WACC formula above that the cost of debt is adjusted lower to reflect the company’s tax rate. For example, a company with a 10% cost of debt and a 25% tax rate has a cost of debt of 10% x (1-0.25) = 7.5% after the tax adjustment.