Weighted Average Cost of Capital
Definition: Weighted Average Cost of Capital is the average rate (percentage) a firm has to pay its various security holders to finance its business, operations and growth and pay.
WACC is used as the minimum return a company must earn when deciding on certain investments, strategies, projects or purchases.
- Total market value of debt = €800 million, of which market value of debt = €250 million and market value of equity = €550 million
- Cost of Debt = 7%
- Corporate Tax Rate = 36%
- Cost of Equity is 14%
Calculation WACC = ( 250/800 * 7% * (1 - 36%) ) + ( 550/800 * 14% ) = 11.01%
This means any investment should have a minimal rate of return of 11.01% to make it worthwhile.
MBA Brief offers brief, yet very accurate definitions of MBA concepts, frameworks, methods and models. We keep it short and provide some links in case you'd like to learn more around a subject.
© 2021 MBA Brief - Last updated: 16-1-2021 - Privacy | Terms