• See: Weighted average cost of capital.
| ||Embedded terms in definition|
| ||Average cost of capital|
Cost of capital
Weighted average cost of capital
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| ||Weighted average cost of capital: Abbreviated Wacc. Reflects the expected average future cost of funds for the upcoming year; found by weighting the cost of each specific type of capital by its proportion in the firm's capital structure.The average cost of all capital used by a firm. In the context of valuing firms, if the capital is a mixture of debt and equity. The discount rate is called weighted average cost of capital. |
Wacc = (1 - tc) * Rd * D/(D+E) + Re * E/ (D+E)
Where tc is the corporate tax rate , Rd is the contractual interest rate on (new) debt, Re is the discount rate on equity, D and E are the market values of debt and equity respectively. The return of all projects accepted by the corporation must exceed the weighted average cost of capital (WACC) to create value for the shareholders.Expected return on a portfolio of all the firm's securities. Used as a hurdle rate for capital investment.
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