# Weighted Average Cost of Capital

The weighted average cost of capital (WACC) is a weighted average of the after-tax required rates of return on a company’s common stock, preferred stock, and long-term debt, where the weights are the fraction of each source of financing in the company’s target capital structure.

## Formula

$r_{WACC} = \displaystyle\frac{D}{D+E} \times r_D \times (1-t) + \displaystyle\frac{E}{D+E} \times r_E$

where

• $r_{WACC}$ is the WACC
• $r_D$ is the before-tax marginal cost of debt
• $r_E$ is the cost of equity
• D denotes the market value of the shareholders’ outstanding debt
• E denotes the market value of the shareholders’ outstanding equity
• t is the marginal tax rate