Weighted Average Cost of Capital (WACC)
The Weighted Average Cost of Capital, or WACC, is the discount rate that satisfies all debt and equity holders of the firm. It takes into account the target composition of the firm’s debt and equity as well as the average rates of return on both forms of capital.
WACC = Re * E/(D+E) + Rd * (1-T) * D/(D+E)
D = Market Value of Debt
E = Market Value of Equity
Rd = Debt Rate; current average interest rate on long-term debt
Re = Discount rate for equity; calculated using CAPM
T = Tax Rate