#### Definition:

Weighted average cost of capital (WACC) is the minimum return which a company is supposed to give on an average to satisfy its entire security proprietors to finance its assets. This tutorial explains you how to calculate Weighted average cost of capital.

#### Formula:

WACC = (E/V x R_{e}) + [(D/V x R_{d}) x (1-T_{c})]
V = E + D
###### Where,

WACC = Weighted Average Cost of Capital
E = Market value of the firm's equity
D = Market value of the firm's debt
V = Firm Value
R_{e} = Cost of Equity
R_{d} = Cost of Debt
T_{c} = Corporate tax rate
#### Example :

Company Hiox has a beta of 1.65. The current equity market risk premium is 7%, and the risk-free rate is 3%. Its before-tax cost of debt is 6% and its marginal tax rate is 40%. The stock sells at Long-Term Debt 6000 and Equity 1500. Find the WACC percentage of the company.?

##### Given

Market value of the firm's equity (E) = 1500
Market value of the firm's debt (D) = 6000
Cost of Equity (R_{e}) = 3% + (7% x 1.65) = 14.55%
Cost of Debt (R_{d}) = 6%
Corporate tax rate (T_{c}) = 40%

##### To Find,

Weighted Average Cost of Capital

##### Solution:

###### Step 1 :

Find value of V
V = E + D
V = 1500 + 6000 = 7500

###### Step 2 :

WACC = (E/V x R_{e}) + [(D/V x R_{d}) x (1-T_{c})]
= (1500/7500 x 0.1455) + [(6000/7500 x 0.06) x (1-0.4)]
= 5.79 %