# Weighted Average Cost of Capital

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 (Re) = % Cost of Debt (Rd) = % Market value of the firm's equity (E) = Market value of the firm's debt (D) = Corporate tax rate (Tc) = % Weighted Average Cost of Capital = %

### Formula of Weighted Average Cost of Capital

WACC = (E/V x Re) + [(D/V x Rd) x (1-Tc)]
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
• Re = Cost of Equity
• Rd = Cost of Debt
• Tc = 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 (Re) = 3% + (7% x 1.65) = 14.55% Cost of Debt (Rd) = 6% Corporate tax rate (Tc) = 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 Re) + [(D/V x Rd) x (1-Tc)]
= (1500/7500 x 0.1455) + [(6000/7500 x 0.06) x (1-0.4)]
= 5.79 % 