In case the company is financed with only shareholder equity E and debt D, the average cost of capital is computed as follows:
| (1) | {\displaystyle {\text{WACC}} = {\frac {E}{D+E}} \, K_E} + {\frac {D}{D+E}}\, K_D \cdot (1-T_c) |
where
K_E | Cost of Equity | |
K_D | Cost of Debt | normally means interest rate on the company loans |
T_c | usually between 15% and 30%, with median average close to 20% |
The value of WACC is usually used to set a reference point for discount rate in investment projects.
See also
Economics / Investment / Financial Investment
[ Profitability Index (PI) ][ Discount rate ][ Net Present Value (NPV) ] [ Internal Rate of Return (IRR) ]