Definition of Weighted Average Cost Of Capital
The weighted average cost of capital or WACC is the average total cost of raising funds for a particular project with weights allocated based on the sum of market values of all the funds. Normally the funds are raised from two primary sources; debt and equity. A third source can also be used for raising funds that are preferred stock.
The formula of WACC is as follows:
Ke = Cost of Equity = Dividend / Market value of share
Kd (1-t) = After tax interest cost on debt
Kp = Preferred dividend percentage
E = Market value of Equity
D = Market value of Debt
P = Market value of Preferred stock
(E+D+P) = Sum of market values of all the funds
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