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Weighted average cost of capital
Corporations raise money from two main sources; equity and debt. Thus the capital structure of a firm is comprised of three main components (preferred equity, common equity and debt (typically bonds and notes). The Weighted Average Cost of Capital takes into accounts the relative weights of each component of the capital structure and presents the expected cost of new capital for a firm.
WACC = Weight of Preferred Equity * Cost of Preferred Equity
+ Weight of Common Equity * Cost of Common Equity
+ Weight of Debt * Cost of Debt
The debt a firm takes on has a tax advantage and hence the cost of debt is not simply the interest rate.
Referenced By
Economic value added
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