Cost of Capital

Estimates weighted average cost of capital (WACC) from equity and debt costs and capital structure.

Formula

WACC = w_E × r_E + w_D × r_D × (1 − tax)

Example

60% equity at 10%, 40% debt at 6%, tax 25% → WACC ≈ 0.6×0.10 + 0.4×0.06×0.75 = 8.4%.

FAQs

CAPM for r_E?
r_E can be estimated via CAPM: r_f + β×(market premium).

Market vs book weights?
Prefer market value weights for WACC.