How Do Business Leaders Calculate Cost of Capital?
Business leaders typically calculate the cost of capital by determining the weighted average cost of capital (WACC). WACC is the average rate of return a company is expected to pay its security holders to finance its assets. It is calculated using the following formula: WACC = (E/V * Re) + (D/V * Rd * (1-T)) Where:
E = Market value of equity V = Total market value of equity and debt Re = Cost of equity D = Market value of debt Rd = Cost of debt T = Corporate tax rate