Formula for Weighted Avg Cost of Capital(WACC) :

The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. It is commonly referred to as the company cost of capital. Importantly, it is dictated by the external market and not by management.the WACC can be calculated with the following formula.

WACC = [ E(D + E) × R_e ] + [ D(D + E) × R_d × (1 - T_c) ]

Where,

WACC  - weighted average cost of capital

R_e  - Cost of equity

R_d  - Cost of debt

D - Market value of the company debt

E - Market value of the company equity

D + E - Total market value of the company financing (debt and equity)

E(D + E) - Percentage of equity financing.

D(D + E) - Percentage of debt financing.

T_c  - Corporate tax rate.

Example :

Debt (D) = $3000

Equity (E) = $9000

R_d = 7%

R_e = 11.5%

Corporate Tax Rate (T_c) = 15%

In above example, the WACC would be calculated as follows:

WACC = [ 9000(3000 + 9000) × 0.12 ] + [ 3000(3000 + 9000) × 0.07 × (1 - 0.15) ]

WACC = [ 900012000 × 0.12 ] + [ 300012000 × 0.07 × 0.85 ]

WACC = [ 0.75 × 0.12 ] + [ 0.25 × 0.07 × 0.85 ]

WACC = [ 0.086 + 0.015 ]

WACC = 0.10113 or 10.11%