Weighted Average Cost of Capital
The Weighted Average Cost of Capital (WACC) is used in finance to measure a firm's cost of capital.
The total capital for a firm is the value of its equity (for a firm without outstanding warrants and options, this is the same as the company's market capitalization) plus the cost of its debt (the cost of debt should be continually updated as the cost of debt changes as a result of interest rate changes). Notice that the "equity" in the debt to equity ratio is the market value of all equity, not the shareholders' equity on the balance sheet.To calculate the firm’s weighted cost of capital, we must first calculate the costs of the individual financing sources: Cost of Debt, Cost of Preference Capital and Cost of Equity Cap..
Calculation of WACC is an iterative procedure which requires estimation of the fair market value of equity capital.
Read more about this topic: Cost Of Capital
Famous quotes containing the words average, cost and/or capital:
“In ‘70 he married again, and I having, voluntarily, assumed the legal guilt of breaking my marriage contract, do cheerfully accept the legal penalty—a life of celibacy—bringing no charge against him who was my husband, save that he was not much better than the average man.”
—Jane Grey Swisshelm (1815–1884)
“How much would it cost you to stand at the wrong end of a shooting gallery?”
—S.J. Perelman, U.S. screenwriter, Bert Kalmar, Harry Ruby, and Norman Z. McLeod. Groucho Marx, Horsefeathers, Huxley College president to con artist Baravelli (Chico Marx)
“In bourgeois society capital is independent and has individuality, while the living person is dependent and has no individuality.”
—Karl Marx (1818–1883)