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. Interest payments are tax-deductible, meaning companies can reduce their tax liability by the amount of interest paid. Hence, RD (cost of debt) is lowered by this tax shield, and the formula reflects this by multiplying the cost of debt by (1 – Tax Rate).
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.