WACC

Weighted Average Cost of Capital

Laoad, E. P.
WACC
The weighted average cost of capital (WACC) is
a calculation of a firm's cost of capital in which
each category of capital is proportionately
weighted.
WACC represents a company’s average cost of
capital from all the capital sources that include:
Sources of
capital
common stock
preferred stock
Bonds
other forms of long-term debt.
Why it matters?
 WACC is used by company management to evaluate
decisions such as capital projects, mergers and
acquisitions, and other large-cost transactions in order
to ensure that their capital structure are within investor
expectations.
 It serves as a benchmark for investors on whether to
invest in a project or a company.
WACC
calculation
WACC is calculated by multiplying the cost of each
capital source (debt and equity) by its relevant weight by
market value, and then adding the products together to
determine the total.

The method of calculating the WACC can be expressed in

the following formula:
WACC formula

WACC = x Re + x Rd x (1- Tc)

Equity Bonds
(ownership) (Debt)
Where:
E = market value of equity
D = market value of debt
V= E+D
Re = cost of equity
Rd = cost of debt, and
Tc = corporate tax rate
Example

☛ ₱1,000,000 in capital
%DUELHV
3ULQFHVVHV%3
☛ 6,000 shares at ₱100 Cost of equity is 6%
→ 6% return

☛ 400 bonds at ₱1000 Cost of debt is 5%

→5% return

Corporate tax rate

☛ 25%
 Solution
E = 6,000 x 100 = 600,000
D = 400 x 1000 = 400, 000
V = (E+D) = 1,000,000
Re = cost of equity 6%
Equity Bonds
Rd = cost of debt 5% (ownership) (Debt)
Tc = 25%
WACC = X 6% + X 5% X ( 1- 25% )
%DUELHV
( .6 X .06 ) ( .02 X .75)
3ULQFHVVHV%3 = .036 = .015

 Benchmark
.  Minimum rate of return
WACC =
 Decision- making
051 = 5.1%
Thank You
Laoad, Erickson P.