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Weighted average cost of capital (WACC) is the average after-tax cost of
a company’s various capital sources, including common stock, preferred
stock, bonds and any other long-term debt.
WACC is calculated by multiplying the cost of each capital source (debt
and equity) by its relevant weight, and then adding the products
together to determine the WACC value:
WACC = E/V*Re+D/V*Rd*(1-Tc)
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
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