# What is WACC (Weighted Average Cost of Capital)?

- Last Updated: June 17, 2020

## Weighted Average Cost of Capital (WACC) Definition

The weighted average cost of **capital** (WACC) is the implied **interest rate** of all forms of the company’s debt and **equity** financing which is weighted according to the proportionate dollar-value of each.

The formula for calculating the weighted average cost of capital is the proportion of total equity (E) to total financing (E + D) multiplied by the cost of equity (Re) , plus the proportion of total debt (D) to total financing (E + D), multiplied by the cost of debt (Rd), multiplied by one minus the tax rate (T).

## Formula for WACC in Simple Terms

The total cost of debt is typically the stated interest rate, minus the tax benefit derived from **interest** payments being deductible.

Because equity has no stated cost, the formula often uses the Capital Asset Pricing Model, where the cost of equity is estimated to be the return that investors expect to receive from their investment.

## The Purpose of WACC

WACC is also used by company management to evaluate decisions such as capital projects, mergers and **acquisitions**, and other large-cost transactions in order to ensure that their WACC and Capital Structure are within investor expectations.

If a company determines that they have a WACC which is too high, they can mitigate this by renegotiating debt or authorizing a share buy-back to reduce the proportion of equity to total financing.

## Making Decisions with WACC

WACC is also used by company management to evaluate decisions such as capital projects, mergers and acquisitions, and other large-cost transactions in order to ensure that their WACC and Capital Structure are within investor expectations.

If a company determines that they have a WACC which is too high, they can mitigate this by renegotiating debt or authorizing a share buy-back to reduce the proportion of equity to total financing.