Series 79: 3.5.8.1. Weighted Average Cost Of Capital

3.5.8.1. Weighted Average Cost of Capital

To account for a company’s specific capital structure, the cost of capital of investing in the company is converted into the weighted average cost of capital (WACC). The WACC is weighted based on the percentage of debt versus equity in the capital structure:

WACC = (after-tax cost of debt x % of debt) + (cost of equity x % of equity)

Or, if you’d rather remember one slightly longer formula instead of two shorter ones, you could combine the above formula with the formula for after-tax cost of debt:

WACC = (pre-tax cost of debt x (1 – tax rate) x % of debt) + (cost of equity x % of equity)

This weighting approach more accu