WACC – Weighted Average cost of capital – (E/E+D)*Ke + [D(1-t)/E+D]*Kd
E – Market Value of Equity
D – Market Value of Debt
Ke – Cost of equity
Kd – Cost of Debt
T – Tax rate
A company is typically financed using a combination of debt (bonds) and equity (stocks). Because a company may receive more funding from one source than another, we calculate a weighted average to find out how expensive it is for a company to raise the funds needed to buy buildings, equipment, and inventory.
It’s important for a company to know its weighted average cost of capital to gauge the expense of funding future projects. The lower a company’s WACC, the cheaper it is for a company to fund new projects.
