WACC (Weighted Average Cost of Capital)

WACC (Weighted Average Cost of Capital) is an indicator that represents the average cost that a company needs to pay to raise capital. Specifically, it has the following characteristics:


Cost of Capital:WACC represents the cost for a company to raise capital (equity and debt). Each type of capital (equity and debt) is proportionally weighted based on its market value.


Benchmark for Investment Decisions:WACC represents the average cost that a company expects to pay to finance its business. Therefore, WACC is a common way to express the return that investors or companies demand to provide capital in one number.


Discount Rate for Financial Modeling:WACC is used as a discount rate for future cash flows in financial modeling. Specifically, when evaluating the value of a business or company, WACC is used as a discount rate to discount free cash flow.


The formula for calculating WACC is as follows:


WACC = \left(\frac{E}{V} \times Re\right) + \left(\frac{D}{V} \times Rd \times (1 - T)\right)


where,

- E is the market value of the company's equity (market cap)

- D is the market value of the company's debt

- V is the total value of capital (sum of equity and debt)

- E/V is the proportion of equity in capital

- D/V is the proportion of debt in capital

- Re is the cost of equity (required return)

- Rd is the cost of debt (yield on existing debt)

- T is the tax rate

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