W

Contact

Miscellaneous Information

WACC - Weighted average cost of capital 

Weighted average cost of capital (WACC) represent the average price that has the company pay to using own capital. These costs are expressed as an interest rate.

Vztah pro WACC vypadá takto:

Where:

D – foreign capital

E – Equity

t - tax rate - interest is included to the costs

rd – required return on foreign capital

re – required return on equity

 

Example:

Let's say that as a company we intend to invest CZK 600,000 in a project. We also want to borrow an additional capital CZK 550,000 from the bank. We demand that we have an equity return of at least 7.5%. The bank asks for 12% and the tax rate is 21%.

D – foreign capital = 550 000 Kč

E – equity = 600 000 Kč

t – tax rate - interest is included to the costs = 21%

rd – required return on foreign capital = 12%            

re –required return on equity = 7,5%

 

pak WACC = 550 000/(550 000 + 600 000) * 12% * (1 - 21%) + (600 000 / (550 000 + 600 000)) * 7,5%

      WACC = 8,45%

Then the WACC result is 8.45%. This means that we should do not actually invest to the project, if a result is less than 8.45%, otherwise we do not satisfy the demands on our own capital (representing the price of the opportunity ) or the demands on foreign capital – there is interest of the bank.