WACC: Weighted Average Cost of Capital Explained

Formula

WACC =

E E + D

× Ke +

D E + D

× Kd × (1 − T)

E / (E+D) = Weight of Equity | Ke = Cost of Equity (CAPM: Rf + β·(Rm − Rf))
D / (E+D) = Weight of Debt | Kd = Cost of Debt (Interest / Debt) | T = Tax Rate

Alpha Finance

WACC of —

WACC —

Cost of Equity (CAPM)

Risk-free rate (Rf)

Expected market return (Rm)

Beta (β)

Cost of Equity (Re = Rf + β·(Rm − Rf))

Cost of Debt (pre-tax)

Interest expense

Total debt

Tax Rate (Tc)

Cost of Debt (Rd ≈ Interest / Debt)

Equity vs Debt

Capital structure: / .

Definition

The Weighted Average Cost of Capital (WACC) represents a company's average cost of financing from both debt and equity. It is the minimum return a firm must earn on its investments to satisfy its creditors and shareholders. A lower WACC signals cheaper financing and higher potential for value creation, while a higher WACC implies greater risk and cost of capital. Companies with a ROIC above WACC are genuinely creating value for investors.

Very Low< 6%

Normal6 – 10%

High10 – 15%

Very High> 15%

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