Weighted average cost of capital (WACC) is the minimum return which a company is supposed to give on an average to satisfy its entire security proprietors to finance its assets. This tutorial explains you how to calculate Weighted average cost of capital.

### Calculator of Weighted Average Cost of Capital

Cost of Equity (R_{e}) | = % |

Cost of Debt (R_{d}) | = % |

Market value of the firm's equity (E) | = |

Market value of the firm's debt (D) | = |

Corporate tax rate (T_{c}) | = % |

Weighted Average Cost of Capital | = % |

### Formula of Weighted Average Cost of Capital

**WACC = (E/V x R _{e}) + [(D/V x R_{d}) x (1-T_{c})] **

**V = E + D**

**Where,**

- WACC = Weighted Average Cost of Capital
- E = Market value of the firm’s equity
- D = Market value of the firm’s debt
- V = Firm Value
- R
_{e}= Cost of Equity - R
_{d}= Cost of Debt - T
_{c}= Corporate tax rate

### Example of Weighted Average Cost of Capital

Company Hiox has a beta of 1.65. The current equity market risk premium is 7%, and the risk-free rate is 3%. Its before-tax cost of debt is 6% and its marginal tax rate is 40%. The stock sells at Long-Term Debt 6000 and Equity 1500. Find the WACC percentage of the company.?

**Given**

Market value of the firm’s equity (E) = 1500 Market value of the firm’s debt (D) = 6000 Cost of Equity (R_{e}) = 3% + (7% x 1.65) = 14.55% Cost of Debt (R_{d}) = 6% Corporate tax rate (T_{c}) = 40%

**To Find**

Weighted Average Cost of Capital

**Solution**

Step 1

Find value of V

**V** = E + D V

= 1500 + 6000

= 7500

Step 2

**WACC** = (E/V x R_{e}) + [(D/V x R_{d}) x (1-T_{c})]

= (1500/7500 x 0.1455) + [(6000/7500 x 0.06) x (1-0.4)]

= 5.79 %

## 0 comments