What is Weighted-average cost of capital?
In short
The weighted-average cost of capital is the average return required by a company's lenders and shareholders: the after-tax cost of debt and the cost of equity, weighted by their proportions in the capital structure, usually at market values.
Key takeaways
- The after-tax cost of debt is the interest rate × (1 − tax rate).
- It is the hurdle rate for projects of average risk.
- Equity costs more than debt because shareholders bear more risk.
Example
60% equity costing 12% and 40% debt at 8% with a 25% tax rate: 0.6 × 12% + 0.4 × 6% = 9.6%.
Where it's tested
BAR: Financial Forecasting, Budgeting & Valuation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A product sells for $80 with variable costs of $50 per unit. Fixed costs are $360,000. How many units must be sold to earn a target operating profit of $90,000?