Weighted Average Cost of Capital WACC - What is the definition and formula - How to calculate

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The Weighted Average Cost of Capital WACC is the average cost that a company expects to pay for it's debt and equity financing. It is pretty simple to calculate the Weighted Average Cost of Capital WACC of a company. It is simply the weighted cost of debt and equity added together. The equation is shown below.

If a company is 100% debt financed then it's Weighted Average Cost of Capital WACC would be the same as the cost of debt. If a company is 100% equity financed then it's Weighted Average Cost of Capital WACC would be the same as the cost of equity.

When management makes capital budgeting decisions they must choose projects that earn a higher return than their Weighted Average Cost of Capital WACC.

XYZ Company is financed with 40% debt and 60% equity. Their cost are 8% and 12% respectively and their tax rate is 34%. What is their weighted average cost of capital?

WACC = [(12%)x(.60)]+[(8%)x(.40)x(1-34%)] = 9.3%

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