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A calculation of a firm's cost of capital in which each category of
capital is proportionately weighted. All capital sources - common stock,
preferred stock, bonds and any other long-term debt - are included in a
WACC calculation. All else equal, the WACC of a firm increases as the
beta and rate of return on equity increases, as an increase in WACC
notes a decrease in valuation and a higher risk.
The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:
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