Question

In our world of finance, Capital = Debt + Equity, and note debt in our context refers mainly to long term debt, Equity refers to two pieces of stock investments plus also retained earnings and its usage.

So with this said how do we derive the "cost" of capital, especially focused on the concept of WACC.

Answer 1

we are driving the weighted average cost of capital by consideration of both the cost of equity and the cost of debt capital because cost of equity is related to to equity shareholders cost whereas we are also using with the cost of that in order to determine the overall weighted average cost of capital after apportionment of their overall vintage in the capital structure.

cost of debt capital is to be adjusted with the interest tax failed because interest rate are tax deductible.

Weighted average cost of capital= (cost of equity X weight of equity)+(cost of debt X weight of debt)(1- tax)

So we are driving the cost of capital after weighting out the overall proportion of different capital in the capital structure.