How to calculate WACC: cost of equity, cost of debt, and capital structure weights. Weighted average cost of capital formula with examples.
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.
Capital structure is irrelevant to firm value in perfect markets. V<sub>L</sub> = V<sub>U</sub>.
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WACC
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)
Where: Tax shield increases levered firm value
Free covers one Quants module. Premium opens all 10 subjects and 59 modules of CFA Level 1.
NPV
Accept if NPV > 0
IRR
Accept if IRR > required return
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Use when:
Avoid when:
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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