The Weighted Average Cost of Capital – WACC is the required return of all the sources of capital used by the company, i.e. for all of the company’s investors, weighted by the market values of the capital components.
WACC is calculated as:
WACC = We * Re + Wd * Rd * (1-T) + Wp * Rp
where:
We = weight of common equity in the capital structure
Re = cost of common equity
Wd = weight of debt in the capital structure
Rd = cost of debt
T = Tax rate
We = weight of preferred stock in the capital structure
Rp = cost of preferred stock
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