What is WACC and how do you calculate it?

Question

Accepted Answer

WACC stands for Weighted Average Cost of Capital. It is the average cost of all the capital used by a company.

WACC is used to determine the minimum return a company must earn on its investments to satisfy its investors.
It is calculated by taking the weighted average of the cost of debt and the cost of equity.
The formula for WACC is: WACC = (E/V x Re) + ((D/V x Rd) x (1 - Tc)), where E is the market value of the company's equity, V is the total market value of the company's capital, Re is the cost of equity, D is the market value of the company's debt, Rd is the cost of debt, and Tc is the corporate tax rate.
WACC is used in capital budgeting to determine whether a project is worth pursuing.
A higher WACC means that a company has to earn a higher return on its investments to satisfy its investors.

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