Weighted Average Cost Of Capital WACC
Definition of 'Weighted Average Cost Of Capital WACC'
A firms capital comes from debt and equity. WACC breaks down each type of capital cost and its weight against the other capital and then sums together all these values to calculate the weighted cost of capital.
Equity is usually common stock but might also include preferred stock and options. Debt will be used lines of credit, bank loans, and bonds.
A simple formula for WACC is:
WACC = (E/C)*Re + (D/C)*Rd*(1-T)
E = Company's market capitalization value
D = Company's debt at market value
Re = cost of equity
Rd = cost of debt
C = E + D
T = tax rate applicable for this corporation
The Net Present Value NPV of the cash flows from a project that a company takes on needs an "inflation" rate plugged into the formula. Companies often use the value of WACC for this rate.
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