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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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