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The weighted average cost of capital (WACC)

The Weighted Average Cost of Capital

(WACC)

1.1 Definition of WACC

The weighted average cost of capital (WACC) is derived by finding a
firm's cost of equity and cost of debt and averaging them according to
the market value of each source of finance:

The formula for calculating WACC is given on the exam formula sheet
as:

V e V d
WACC = k + k (1 – T)
e
d
V + V d V + V d
e
e
Where k e = cost of equity
k d(1–T) = cost of debt

V e and V d = market values of equity and debt

T = tax rate

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