Weighted Average Cost Of Capital




Weighted Average Cost Of Capital 

 * The Weighted Average Cost Of Capital is the rate that a company is expected to pay on average to all its security holders to finance its assets .

 * Weighted average cost is dictated by the external market , not by management .

 * The Weighted Average Cost Of Capital represents the minimum return that a company  must earn on an existing assets base to satisfy its creditors , owners , and other provider of capital , or they will invest elsewhere .

 # FORMULA 

     WACA = E/V × Re + D/V × Rd × ( 1-Tc )

 Where :-

 * WACA = Weighted Average Cost Of Capital

 * Re = Cost of equity 

 * Rd = Cost of debts

 * E = Market value of firm equity

 * D = Market value of firm debts

 * V = E + D ( Total market value of the firms finance )

 * E/V = Percentage of financing that is equity

 * D/V = Percentage of financing that is debts

 * Tc = Corporate tax rate 

* Securities analysts frequently use Weighted Average Cost Of Capital  when assessing the value of investment .

 * The limitation is that the Weighted Average Cost Of Capital
   formula seems easier to calculate than it really is .

* Elements of the formula , like cost of equity , are not consistent values .

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