WACC

A method to measure firm's cost of capital. Corporations raise money from two main sources: equity and debt. Thus the capital structure of a firm comprises two main components: equity and debt. The WACC takes into account the relative weights of each component of the capital structure and presents the expected cost of new capital for a firm.

The formula for calculating WACC is as follows:

(Total Equity ÷ Total Capital × cost of equity) + (Total Debt ÷ Total Capital × cost of debt) × (1-tax rate)

WACC is typiclly used by firms as a discount rate for calculation of present value of a projected cash flow.

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