WACC Weighted Average Cost of Capital in 3 Minutes

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  • 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”).

 

 

  • 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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WACC Weighted Average Cost of Capital in 3 Minutes, 4.6 out of 5 based on 34 ratings

42 Comments

  • Talha Saleem

    Reply Reply 1 December 2011

    your website is very best............

  • vanessa cuba

    Reply Reply 10 December 2011

    so nice, i really understand... thanks

  • mohamed

    Reply Reply 4 May 2012

    very good explanation, thank you alot
    ..... hope you upload series of CMA contents

    best regards

    • David

      Reply Reply 8 May 2012

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

  • Pam

    Reply Reply 7 May 2012

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

  • Saf

    Reply Reply 11 August 2012

    Amazing stuff!

  • fiume

    Reply Reply 13 November 2012

    I 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

      Reply Reply 22 November 2012

      Hi, 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

    Reply Reply 26 November 2012

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

    • David

      Reply Reply 29 November 2012

      Hey April, you're also welcome 100%!

  • Leo

    Reply Reply 27 November 2012

    I'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

      Reply Reply 29 November 2012

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

  • Mitch Fleming

    Reply Reply 12 December 2012

    Hi 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

      Reply Reply 15 December 2012

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

  • Rosa

    Reply Reply 28 December 2012

    Hi 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!

  • Arheen

    Reply Reply 29 January 2013

    Hi Sir,
    A simple and extremely useful video.
    Thanks a lot

    • David

      Reply Reply 2 February 2013

      Thanks and welcome Arheen!

  • olubunmi oladele-ajose

    Reply Reply 4 April 2013

    Awesome teaching!!!
    Thank you.

  • mba

    Reply Reply 14 April 2013

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

    • David

      Reply Reply 20 April 2013

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

  • krishna rd

    Reply Reply 22 April 2013

    awsum.................. i really understande the concept............. thank u SIR>>>>>>>>>>>>

    • David

      Reply Reply 25 April 2013

      You're welcome @Krishna>>>>>>>>>>

  • steve

    Reply Reply 3 June 2013

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

    • David

      Reply Reply 5 June 2013

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

  • Kubra

    Reply Reply 6 June 2013

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

    • David

      Reply Reply 15 July 2013

      @Kubra wow I hope you did good in your exam

  • Yemi

    Reply Reply 12 June 2013

    I 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?

  • Hloni

    Reply Reply 27 October 2013

    Your 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

      Reply Reply 28 October 2013

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

  • Sham

    Reply Reply 29 October 2013

    OMG! you're a Jedi!
    your videos are super helpful!
    WACC for the win yo~ :-)
    Zillion thanks Dave~

    • David

      Reply Reply 2 November 2013

      @Sham: May the force be with you ;)

  • SA

    Reply Reply 19 January 2014

    Thank you Thank you Thank you Thank you. you explain it in such a simple way.

    • David

      Reply Reply 25 January 2014

      @SA welcome welcome welcome!

  • Anil

    Reply Reply 23 February 2014

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

    • David

      Reply Reply 23 February 2014

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

  • Sarwan

    Reply Reply 18 March 2014

    Hi 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

    Reply Reply 30 April 2014

    Hey, 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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