What is Weighted Average Cost of Capital?

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Expert Solution

WACC is the overall weighted cost of capital of all category financed. It means it included Debt, Equity and preference capital on the basis of there weight.

First We have to calculate the weight of each category capital and what is the cost of each capital

Secondally Weight Should be multiply with Cost of capital of that categary

And in the last total of all the category of Weighted average cost of capital will be the Weighted average cost of Capital

Example:

We have equity of $ 2,000,000 with 13% Cost

Preferred Stock of $ 3,000,000 with 10% of Cost

Debt Finance with $ 5,000,000 with 8% Cost (After Tax)

We Will find the WACC of capital of the above as below,

Particlulars	Value	Weight	Cost	WACC = ( Weight* Cost)

Equity Stock	$ 20,00,000	20.00%	13.00%	2.60%

Preferred Stock	$ 30,00,000	30.00%	10.00%	3.00%

Debt	$ 50,00,000	50.00%	8.00%	4.00%

Total	$ 1,00,00,000	100.00%		9.60%

ekkarill92 answered 1 year ago

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