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

A more comprehensive content for the concept will be available later.

We will include related examples and CFA questions that are also hyperlinked to the appropriate definitions.