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
Shoreham, New York

... income for a household in the village is $109,719, and the median income for a family is $116,985. Males have a median income of $81,873 versus $31,250 for females. The per ...

 
 
 
This page was created in 27.3 ms