Practice calculating weighted average cost of capital including cost of debt, cost of equity using CAPM, and capital structure analysis. Free questions with solutions.
Start practising now — it's free Read study guidesWACC is the blended cost of all the firm's financing — debt and equity — weighted by their proportions. WACC = (Wd × Kd × (1-T)) + (We × Ke). The after-tax cost of debt is lower than pre-tax because interest is tax-deductible. Cost of equity uses CAPM: Ke = Rf + β(Rm − Rf).
A higher beta means more systematic risk and a higher required return. A company's WACC is the minimum return its investments must earn — projects returning less than WACC destroy value. Understanding the drivers of WACC is essential for both capital budgeting and corporate valuation.
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