WACC Weighted Average Cost of Capital in 3 Minutes (Video Playlist Below)

3-Minute Overview: (Also Download Free Cheat Sheet at Bottom)

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WACC Calculation SUPER EASY Part 1

WACC Calculation SUPER EASY Part 2

WACC Exam Preparation Premium Video (Free Preview)
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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”).

• 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 above.