 In this section, I'm going to explain how the weighted cost of capital, what is meant by weighted cost of capital and how do we calculate this. So weighted average cost of capital or VAC is basically a model or a method through which we try to find out the cost of capital. In other words, we can say that we are going to find out the average cost of capital which you are going to pay when you have taken capital from different sources such as the common stock, the preferred stock, bonds and all the other forms of debt. We use the concept of VAC to calculate the cost of capital. Now the weighted average cost of capital is an easy and common way of calculating the required rate of return. Now to calculate the required rate of return, when you use its formula, you will get a single number which tells you that this is the return which the shareholders are demanding in order to keep their capital with the company. So you can imagine that we have to return this much overall so you define the decisions of the capital structure accordingly. Now if a firm's VAC or weighted average cost of capital will be higher if its stock of relatively volatile or if its debt is seen as risky because investors are expecting that this company's financial performance is not very strong or that it is prone to some kind of fluctuation. So they will ask for a higher rate of return and naturally VAC's value will be very high. Now if you look at the formula and we are going to by the help of an example, we will see how this particular value can be calculated. So we basically need to use the formula to calculate the VAC. The market value of the firm's equity which is represented by E and we need the market value of the firm's debt. And with this R E is the cost of equity. This is cost of debt. So cost of equity is your total proportion. This is debt to overall your investment which we are representing from V. With that you have taken out the ratio and you have taken out the cost of debt. Similarly, you have taken out this ratio and you have multiplied it with cost of equity. And then you have to multiply these two after collecting 1 minus tax rate. So V is basically the sum of equity and debt. So we incorporate this information and collect it from the market in this formula in order to find out the value of VAC and which is the rate of return. And if we look at this particular section of this formula, this gives you the weighted value of the equity capital. You have put the cost of equity in it and the equity to total which is your total financing is the ratio defined. Similarly, this part of the formula, that gives you the weighted value of debt capital. So weighted value of equity capital and weighted value of debt capital. You are multiplying it from 1 minus tax rate to calculate the weighted average cost of capital. Now I am going to explain this with an example. Suppose there is a company just made $100,000, sorry $1 million debt financing or $4 million equity financing. This means that the total that is $1 million plus $4 million is $5 million. So the total financing is $5 million. Out of which $1 million is the debt and the remaining $4 million is equity. The proportion of equity-based financing e divided by V will be 4 divided by 5 is 0.8. And you can look at this formula. The breakup is 0.8. This is $4 million divided by $5 million. Similarly, you will find the proportion of debt-based financing which is given by D divided by V. And that is given as 0.2. Where did this come from? That is the financing of debt was $1 million and the total financing is $5 million. So 1 divided by 5 will give you a $0.2. So this is how you can find out how much equity-based financing is and how much debt-based financing is. You have to calculate these two proportions. Then you have to multiply them with corresponding costs. Then you have to collect them. If you multiply them with 1 minus Tc, then you will get weighted average cost of capital. From there, you will get an idea that with this combination, our overall cost of capital is coming out. This means that people are financing equity and debt with you. Investors are trying to take this amount of return from you. So this is how we can use this formula and use this number which will be obtained to have an assessment of the weighted average cost of capital.