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Cost of capital

Weighted Average Cost of Capital

(WACC)

1.1 Definition of WACC

The weighted average cost of capital (WACC) is used as a discount
rate when performing investment appraisals.

The WACC will be used when calculating a project’s NPV to
determine if a project is feasible.

The WACC is calculated as:

Cost of equity (k e) × proportion of total finance made up by equity X

+

Cost of debt (k d) × proportion of total finance made up by debt X

––––––

WACC
––––––

Each type of equity and debt finance will be included to work out the overall WACC
for the entity.

To calculate WACC, a calculation of the cost of equity and the cost of debt must be
performed.

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