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## (See infographic & cheat-sheet PDF below)

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**Download my FREE Cheat-Sheet PDF for WACC Weighed Average Cost of Capital click here**

- Money (capital) needed to run a company comes from either borrowing (debt) or the owners’ money (equity).

- The COST of capital is either the interest payment on the debt, or the required profit that the owners want in return for their investment (in MBA bullshit language: “expected return”).

- The expected return or COST OF EQUITY is determined by another financial model, the CAPM or the CAPITAL ASSET PRICING MODEL.

- When you COMBINE BOTH the interest rate of debt AND the ‘expected return’ of the investors/owners, we get the total cost of capital.

- If the cost of debt (e.g. interest) and cost of equity (expected return) are different, then we have to get an AVERAGE of the two to get our COST OF CAPITAL

- Cost of capital is expressed as a percentage; because it’s compared to the total capital (as a percentage of the total capital). Just like bank loan interest is expressed as a percentage of your total loan.

- What if your company has more debt vs. equity, OR vice versa? Then our formula must give more importance or ‘WEIGHT’ to whichever is bigger; and must give LESS weight to whichever is SMALLER. Thus, we have the WACC or Weighted Average Cost of Capital concept.

- This is the basic WACC or Weighted Average Cost of Capital Formula:

**WACC** = (Debt Proportion)(Cost of Debt %)(1 - tax rate %) + (Equity Proportion)(Cost of Equity %)

- To understand this formula step-by-step in action, watch my free video below.

## Step-by-step WACC Calculation

Part 1

## Step-by-step WACC Calculation

Part 2

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## 42 Comments

Talha Saleem

1 December 2011your website is very best............

vanessa cuba

10 December 2011so nice, i really understand... thanks

mohamed

4 May 2012very good explanation, thank you alot

..... hope you upload series of CMA contents

best regards

David

8 May 2012Glad you like the explanation! I'm not sure, what is CMA?

Pam

7 May 2012Very helpful- glad I stumbled across your website before my final next week! Thank you!

David

8 May 2012Good luck in your finals Pam!

Saf

11 August 2012Amazing stuff!

David

11 August 2012Thanks Saf!

fiume

13 November 2012I do not understand the last part: Why do I compare the cost of capital to a project's return rate? One is the cost (I take X money and pay y interest/ return) and one is earning (I pay X for a project and take Y money in return). How can that be useful?

Thanks in advance!

David

22 November 2012Hi, not sure I understand your 2nd sentence.. but your project's rate of return is how much you earn, and your cost of capital is the expense of the money you're using for your project. So your rate of return should be higher than it.

April Ondis

26 November 2012You should be teaching this material instead of my actual professor! Thanks for increasing my understanding of the WACC by 100%

David

29 November 2012Hey April, you're also welcome 100%!

Leo

27 November 2012I'm very interest with your presentation. As you know that my education is engineering but i'm very interesting it. Could you please upload also how to calculate the long run marginal cost...... Thank you...

Leo..

David

29 November 2012Thanks for your interest Leo! Unfortunately I don't have a lesson on that as of now. Cheers!

Mitch Fleming

12 December 2012Hi David, I'm currently taking a course in financial business and your video explaining WACC, has been such a big help.. I hope one day I can understand business as well as you explain it..

David

15 December 2012Great to know it's been a big help, Mitch!

Rosa

28 December 2012Hi David,

Your videos are very helpful .... you explain in a simple way which makes it to be easily understood. Thank you. I have created a user account and I wanted to access the solution for the Exam preparation question of WACC. But I am not able to open it. I will be very grateful if you can let me know how to access it or send the answer to my email.

Thank you so much in advance!

David

2 January 2013Hello Rosa, that video is one of the premium videos; choose any of the premium plans here:

http://mbabullshit.com/blog/conversiona/

Cheers!

Arheen

29 January 2013Hi Sir,

A simple and extremely useful video.

Thanks a lot

David

2 February 2013Thanks and welcome Arheen!

olubunmi oladele-ajose

4 April 2013Awesome teaching!!!

Thank you.

David

5 April 2013Welcome @Olubunmi! (again!)

mba

14 April 2013Thanks for all your help. The textbooks I've used are horrible. Wish I had discovered this earlier.

David

20 April 2013Well, I'm also glad you discovered it now @mba

krishna rd

22 April 2013awsum.................. i really understande the concept............. thank u SIR>>>>>>>>>>>>

David

25 April 2013You're welcome @Krishna>>>>>>>>>>

steve

3 June 2013respect!! now i can see the world of finances.. hope you will make a lot of video in the future

David

5 June 2013@Steve respect to you too and glad you can now see a different world; cheers

Kubra

6 June 2013I have an exam tomorrow and it's been really useful! thankss!

David

15 July 2013@Kubra wow I hope you did good in your exam

Yemi

12 June 2013I came across this website yesterday and I have since found it very straight forward. I now have more knowledge about some of the financial concepts that I had much difficulty in understanding.

Can you please specify where to find the step by step solution to the WACC Exam type of Questions?

I have an exam question that includes the concept of covariance and variance and corporate bonds as well as the expected return on the stock exchange. I am not sure of how to go about the question. Can you please help?

David

19 June 2013Hello Yemi, you can find WACC exam step by step training as one of the premium videos, if interested, please sign up here: http://mbabullshit.com/blog/conversiona/ You can also check out what other videos I have there, Cheers!

Hloni

27 October 2013Your videos are very good. I bumped into this website today, can't keep myself off it. Makes finance easy. They are also easy and fast to stream considering the cost of internet here in South Africa. We need more people like you to create value in people's life.

Thank you lots.

David

28 October 2013@Hloni, it's an honor to have a viewer all the way from South Africa; all the best

Sham

29 October 2013OMG! you're a Jedi!

your videos are super helpful!

WACC for the win yo~

Zillion thanks Dave~

David

2 November 2013@Sham: May the force be with you

SA

19 January 2014Thank you Thank you Thank you Thank you. you explain it in such a simple way.

David

25 January 2014@SA welcome welcome welcome!

Anil

23 February 2014All the concepts are very easy to understand and quick learning methods...thanks david sir.. you are awesome ...good work

David

23 February 2014@Anil glad you find it quick and easy, you're very welcome!

Sarwan

18 March 2014Hi David,

Loved your explanations and style of presentation. Can you also do a lecture on Dixit's method of calculating cost of equity and WACC?

Cheers and thanks for your great work.

Ling

30 April 2014Hey, your video is great. But I am slightly confused with the WACC formula. On my lecture notes, the formula includes the market value. Is that the same WACC or different??

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