You're here:  Home --> Dictionary --> W --> WACC

CAPM
Debt/equity
Leverage
CAGR

Wtd Avg Cost of Capital (WACC)
Term category: Finance/Accounting
In 10 words or less: The cost associated with a firm's capital structure.

Definition: The weighted average cost of capital is the cost associated with a firm's capital structure.  It's characterized by the following equation:

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

E = Market value of the firm's equity
D = Market value of the firm's debt
V = Market value of the firm (E + D)
Re = Cost of equity
Rd = Cost of debt
T = corporate tax rate (typically 35%)

WACC's typically fall in the 6% to 15% range.

More Details: Companies are financed by a combination of debt and equity.  They then invest this money by putting it to use, whether it be in purchasing inventory or buying new plants.  There is a cost of using this capital (money isn't free) so they try to earn returns in excess of this cost.  The cost is referred to as the weighted average cost of capital (WACC).

Related Articles

Capital Asset Pricing Model
The CAPM is commonly used to calculate the cost of equity for a firm.  You can then plug this number into the WACC equation to come up with the firm's weighted average cost of capital.

Weighted Average Cost of Capital
This page gives a quick explanation of how to compute the WACC.

Cost of Capital by Sector
This page gives detailed data regarding the WACC's by sector of the economy

Related Books

Good to Great by Jim Collins
Valuation for Mergers, Buyouts, and Restructurings by Enrique R. Arzac
The Balanced Scorecard by Robert Kaplan
Fortune at the Bottom of the Pyramid by C.K. Prahalad

# -A - B - C - D - E - F - G - H - I - J - K - L - M - N - O - P - Q - R - S - T - U - V - W - X - Y - Z