Weighted average cost of capital (WACC)

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Weighted average cost of capital (WACC)

WACC =

Market value of Equity

Total value of financing

x Cost of equity +

Market value of debt

Total value of financing

x Cost of debt x (1 - tax rate)

CALCULATION:

Dividing the market value of the firm’s equity by the total market value of the company’s equity and debt multiplied by the cost of equity multiplied by the market value of the company’s debt by the total market value of the company’s equity and debt multiplied by the cost of debt times 1 minus the corporate income tax rate.

INTERPRETATION:

Management typically uses this ratio to decide whether the company should use debt or equity to finance new purchases.

Also this is the cost of capital, or the interest rate, your investors require to put money into your business.

Generally, this rate should be at least 12% to 25%. And for small businesses the rate can be much higher

Operating Income :