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.
- is the WACC
- is the before-tax marginal cost of debt
- 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