The Weighted Average Cost of Capital (WACC) is a measure used to determine an organization’s cost of capital based on the mix of debt & equity funding it has employed. This figure can be calculated using the following formula: WACC = (E/V)* Re + ((D/V)* Rd) * (1-Tc). Where E represents the market value of equity, V represents total market value of debt & equity, Re is the cost of Equity, D is the market value of debt, Rd is the cost of Debt and Tc stands for tax rate.
For example, if XYZ Corporation has a total market value consisting of $400 million in both debt & equity with a cost of equity at 9% and cost of debt at 7%, while their effective tax rate is 30%. Their WACC is calculated in the following way:
WACC = ($400m / $800m) * 9% + ($400m/$800m )* 7%) *(1 – 0.30)
WACC = 8.5%
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