Overview
The weighted average cost of capital is a way to combine the equations for the value of debt and the value of equity into a single equation for the value of the firm as a whole.
{% V = \sum \frac{FCF_t}{(1 + WACC)^t} %}
where FCF is the free cash flow to the firm.
{% WACC = w_d(1 - TaxRate)r_d + w_e \times r_e %}
- {% w_d %} - percentage debt
- {% r_d %} - the cost of debt. This the interest rate that the firm pays for its. Typically, the cost of debt is taken to be blended rate of interest that the firm pays on its various contracts.
- {% w_e %} - percentage equity
- {% r_e %} - the cost of equity
- {% TaxRate %} - is the corporate tax rate faced by the firm
(see Weighted Average Discounting)