The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets.

The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere. Companies raise money from a number of sources: common equity, preferred equity, straight debt, convertible debt, exchangeable debt, warrants, options, pension liabilities, executive stock options, governmental subsidies, and so on. Different securities, which represent different sources of finance, are expected to generate different returns. The WACC is calculated taking into account the relative weights of each component of the capital structure. The more complex the company's capital structure, the more laborious it is to calculate the WACC.

Companies can use WACC to see if an investment projects available to them are worthwhile to undertake[1].

Contents [hide]
1 Calculation
3 References

 CalculationIn general, the WACC can be calculated with the following formula[2]:

where N is the number sources of capital (securities, types of liabilities); ri is the required rate of return for security i; MVi is the market value of all outstanding securities i.

Tax effects can be incorporated into this formula. For example, the WACC for a company financed by one type of shares with the total market value of MVe and cost of equity Re and one type of bonds with the total market value of MVd and cost of debt Rd, in a country with corporate tax rate t is calculated as:

Cost of capital
Discounted cash flow
Internal rate of return
Minimum acceptable rate of return
Modigliani-Miller theorem
Net present value
Opportunity cost
 References1.^ G. Bennet Stewart III (1991). The Quest for Value. HarperCollins.
2.^ J. Miles und J.... [continues]

### Cite This Essay

APA

(2011, 02). Wacc. StudyMode.com. Retrieved 02, 2011, from http://www.studymode.com/essays/Wacc-576221.html

MLA

"Wacc" StudyMode.com. 02 2011. 02 2011 <http://www.studymode.com/essays/Wacc-576221.html>.

CHICAGO

"Wacc." StudyMode.com. 02, 2011. Accessed 02, 2011. http://www.studymode.com/essays/Wacc-576221.html.