Page 23 - F2 Integrated Workbook STUDENT 2019
P. 23
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.
15
