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WACC - Weighted average cost of capital

The weighted average cost of capital (WACC) is used in finance to measure a firm's cost of capital. It has been used by many firms in the past as a discount rate for financed projects, since the cost of the financing seems like a logical price tag to put on it.

Corporations raise money from two main sources: equity and debt. Thus the capital structure of a firm comprises three main components: preferred equity, common equity and debt (typically bonds and notes). The WACC takes into account the relative weights of each component of the capital structure and presents the expected cost of new capital for a firm.

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    1 total equity and equity equivalents E    Mio. EUR 
    2 total debt and leases D    Mio. EUR 
    3 total capital invested in the going concern K=D+E    Mio. EUR 
    5 required or expected rate of return on equity y   
    6 required or expected rate of return on borrowings b   
    7 corporate tax rate tc   
    9 WACC (weighted average cost of capital) c=(E/K)*y+(D/K)*b(1-Xc  
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    (source: Weighted average cost of capital. (2006, December 2). In Wikipedia, The Free Encyclopedia. Retrieved 22:14, December 9, 2006, from

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