Weighted average cost of capital (WACC), denoted by Rwacc, which is the average cost of capital the firm must pay to all of its investors, both debt and equity holders. If the firm has no debt, then Rwacc = RE (cost of equity).Because debt is generally less risky than equity, Rwacc is generally less than RE. WACC reflects the average risk of all of the firm’s investments. The formula is:E = Equity, use the market value of equity, not the book value. D = Debt RE = Cost of equity RD = Cost of debt T = Corporate tax rateThe weights in the WACC formula come from the company’s Debt-to-Capital Ratio and Equity-to-Capital Ratio:Interest payments reduce a company’s taxes, so the effective cost of debt is lower. That’s why we multiply RD by (1 – Tax Rate) in the WACC formula.
Learn Weighted Average Cost of Capital (WACC) with interactive examples and practice exercises in our Valuation module.
This interactive learning module helps you understand Weighted Average Cost of Capital (WACC) through hands-on practice and real-world examples.