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

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

where

- $latex r_{WACC}$ is the WACC
- $latex r_D$ is the before-tax marginal cost of debt
- $latex r_E$ 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

## 2 thoughts on “Weighted Average Cost of Capital”