Question

based on the review of formulas, how do you calculate WACC? Please provide an example.

Answer 1

WACC is the cost of capital for a firm. WACC takes into consideration the weights of different types of capital and their respective costs.

WACC also called the Weighted Average Cost of Capital is calculated using the formula-

WACC =W equity x C equity + W debt x C debt(1-tax) + W preferred x C preferred

Here, W=Weight and C=Cost

Tax rate is deducted from the cost of debt because it has a tax shield.

Example

If W equity = 25% cost = 10%

W debt = 50% cost = 6% tax rate = 20%

W preferred = 25% cost 8%

WACC = 0.25 x 10% + 0.50 x 6%(1-0.20) + 0.25 x 8%

= 2.5% + 2.4% + 2%

= 6.9%

Do let me know in the comment section in case of any doubt.