Weighted average cost of capital, Finance Basics

Weighted Average Cost of Capital

Weighted Average Cost of Capital or WACC is also called the overall or composite cost of capital. Since various capital components have different percentage cost, it is significant to determine a single average cost of capital attributable to different costs of capital. This can be determined on the basis of percentage cost of each capital component.

Market value weight or proportion of every capital component.

W.A.C.C = Ke (E/V) + Kp (P/V) + Kd (1+T) (D/V)  

Whereas: Ke, Kp and Kd = Percentage cost of equity, preference debate capital and share capital respectively

E, P and D = Market value of equity, preference share capital and debt capital respectively.

NB: Market value = Market price of a security x Number of securities.

V = Total market value of the firm = E + P + D.

Posted Date: 1/30/2013 4:30:57 AM | Location : United States

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