#cfa-level-1 #corporate-finance #reading-36-cost-of-capital
WACC = wdrd(1 – t) + wprp + were
where
wd = the proportion of debt that the company uses when it raises new funds
rd = the before-tax marginal cost of debt
t = the company’s marginal tax rate
wp = the proportion of preferred stock the company uses when it raises new funds
rp = the marginal cost of preferred stock
we = the proportion of equity that the company uses when it raises new funds
re = the marginal cost of equity
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2. COST OF CAPITALal. The weights in this weighted average are the proportions of the various sources of capital that the company uses to support its investment program. Therefore, the WACC, in its most general terms, is
Equation (1)
<span>WACC = w d r d (1 – t) + w p r p + w e r e
where
w d = the proportion of debt that the company uses when it raises new funds
r d = the before-tax marginal cost of debt
t = the company’s marginal tax rate
w p = the proportion of preferred stock the company uses when it raises new funds
r p = the marginal cost of preferred stock
w e = the proportion of equity that the company uses when it raises new funds
r e = the marginal cost of equity
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