Cost of Capital WACC

The Weighted Average Cost of Capital would help measure a company's cost of capital. When expanding a business, the cost of capital would include the required return to make the investment worth the cost. When computing for the cost of capital, the cost of equity and the cost of debt are also considered. Determining the cost of capital for the company would help in deciding how the company could get more money for its growth. The company may borrow money or sell stocks based on the cost of capital. The cost of capital is the rate of return that the company would get if it invests its money in another vehicle but with the same financial risk.

When the Weighted Average cost of Capital is determined, it is the rate at which the company is expected to return the investment for the assts of the company. The WACC is the minimum amount that the company must earn from its assets in order to return the investment to its owners, creditors and to the other sources of funding.

To compute for the weighted average cost of capital, all sources of capital must be taken into consideration. The following formula is used:

WACC = (E/V) * Re + (D/V) * Rd * (1-Tc)

Where E = market value of the equity of the company, D = market value of the debt of the company, V= E+D, Re is the cost of equity, Rd is the cost of debt and Tc is the rate of the corporate tax.