Encyclopedia > Weighted average cost of capital

  Article Content

Weighted average cost of capital

Corporations raise money from two main sources; equity and debt. Thus the capital structure of a firm is comprised of three main components (preferred equity, common equity and debt (typically bonds and notes). The Weighted Average Cost of Capital takes into accounts the relative weights of each component of the capital structure and presents the expected cost of new capital for a firm.
 WACC = Weight of Preferred Equity * Cost of Preferred Equity 
      + Weight of Common Equity * Cost of Common Equity 
      + Weight of Debt * Cost of Debt

The debt a firm takes on has a tax advantage and hence the cost of debt is not simply the interest rate.



All Wikipedia text is available under the terms of the GNU Free Documentation License

 
  Search Encyclopedia

Search over one million articles, find something about almost anything!
 
 
  
  Featured Article
North Lindenhurst, New York

...   Contents North Lindenhurst, New York North Lindenhurst is a town located in Suffolk County, New York. As of the 2000 census, the town had a total population of ...

 
 
 
This page was created in 22 ms