🏢 Corporate Issuers

WACC Formula — Weighted Average Cost of Capital Explained

How to calculate WACC: cost of equity, cost of debt, and capital structure weights. Weighted average cost of capital formula with examples.

Key Concepts

WACC

Weighted average cost of capital = w<sub>d</sub>r<sub>d</sub>(1-t) + w<sub>e</sub>r<sub>e</sub>. Blended cost of debt and equity financing.

MM Proposition I (no taxes)

Capital structure is irrelevant to firm value in perfect markets. V<sub>L</sub> = V<sub>U</sub>.

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Formulas

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WACC

WACC = wd × rd × (1-t) + we × re

Where: w = weight, r<sub>d</sub> = cost of debt, r<sub>e</sub> = cost of equity, t = tax rate

MM Prop I (with taxes)

VL = VU + t × D

Where: Tax shield increases levered firm value

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Master Formula Sheet -- Corporate Issuers

NPV

NPV = Σ[CFₜ / (1+r)ᵗ] - Initial Investment

Accept if NPV > 0

IRR

Rate where NPV = 0

Accept if IRR > required return

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Decision Frameworks

More debt or more equity?

Use when:

  • More debt: stable cash flows, high tax rate, low financial distress costs (e.g., utilities)
  • More equity: volatile cash flows, high growth, significant intangible assets (e.g., tech)

Avoid when:

  • Too much debt for cyclical businesses — financial distress costs dominate

Test Your Understanding

Given: D/V=30%, E/V=70%, r<sub>d</sub>=6%, r<sub>e</sub>=14%, tax=25%. WACC is closest to:

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