Weighted Average Cost Of Capital (WACC), Commodity Historic Prices, Index Prices, And Country Risk
The Weighted Average Cost of Capital (WACC) is a calculation of a companys proportionately weighted capital according to specific categories. All sources of capital common stock, preferred stock, bonds, and any other debt are included. Its computed by multiplying the cost of each capital source by its proportional weight (% of total capital) and then working through this equation.
WACC = (E/V) * Re + (D/V) * Rd * (1-Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firms equity
D = market value of the firms debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
The WACC is useful in determining how a company gains its capital. Is it financing itself through debt or equity? The WACC helps answer that question. Computing WACC offers insight into a companys ability to make returns upon its investments and, hence, money for investors. The WACC is often used by internal management to steer the company toward...
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