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What are the main components of WACC and how do you calculate it?
Weighted average cost of capital (WACC) is a formula used to determine the return on investment in a company, and it is comprised of the sum of a company’s proportional debt and equity multiplied by the cost of debt and cost of equity, respectively.
WACC = (E/V x Re) + (D/V x Rd x (1-T))
- Equity (E) is the market value of the company’s outstanding shares, so E/V is the percentage of the company’s value that is equity.
- Debt (D) is the market value of the company’s debt, so D/V is the percentage of the company’s value that is debt.
- Value (V) is the value of the company’s capital, or E+D.
- Re is the cost of equity
- Rd is the cost of debt
- Tax (T) is the corporate tax rate.
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