Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital

$$\text{WACC}=r_d(1-t)\frac{D}{D+E+Pfd}+r_{ps}\frac{Pfd}{D+E+Pfd}+r_e\frac{E}{D+E+Pfd}$$

Where:

• $r_d$ = Cost of Debt
• $r_{ps}$ = Cost of Preferred Shares
• $r_e$ = Cost of Equity
• $t$ = marginal tax rate
• $D$ = market value of debt
• $Pfd$ = market value of preferred stock
• $E$ = market value of equity

Represents the average rate a company is expected to pay to finance its assets, weighted by the proportion of each component in the Capital Structure.