WACC (‘Weighted Average Cost of Capital’).
This Weighted Average reflects the blended average return for all providers of capital to the company. We call this blended average return the Weighted Average Cost of Capital.
Weighted Average Cost of Capital (WACC) Components:
✅Debt / (Debt + Equity) – the value of Debt (typically Book Value) relative to the total value of Debt + Equity.
✅Cost of Debt (Kd) – the current blended return expected by Lenders to the Company. Typically calculated as the weighted average Yield to Maturity for all components of the Company’s Debt. Note that we look at the Cost of Debt on an after-tax basis because Interest is tax-deductible, which lowers the true Cost of Debt.
✅Debt / (Debt + Equity) – the value of Equity (always Market Value) relative to the total value of Debt + Equity.
✅Cost of Equity (Ke) – the level of Return expected by Investors in the Business which is calculated using the Capital Asset Pricing Model (or ‘CAPM’) formula.
𝗙𝗼𝗹𝗹𝗼𝘄 @FinanceableTraining for more investment banking interview prep.
💡𝗥𝗲𝗮𝗱𝘆 𝘁𝗼 𝗯𝗿𝗲𝗮𝗸 𝗶𝗻𝘁𝗼 𝗙𝗶𝗻𝗮𝗻𝗰𝗲? 𝗪𝗲 𝗼𝗳𝗳𝗲𝗿 𝗮 𝗯𝘂𝗻𝗰𝗵 𝗼𝗳 𝗳𝗿𝗲𝗲 𝗿𝗲𝘀𝗼𝘂𝗿𝗰𝗲𝘀 𝘁𝗵𝗮𝘁 𝗰𝗮𝗻 𝗵𝗲𝗹𝗽 𝘆𝗼𝘂 𝗴𝗲𝘁 𝗼𝗻 𝘁𝗵𝗲 𝗽𝗮𝘁𝗵.
🔗𝗦𝗲𝗲 𝗹𝗶𝗻𝗸 𝗶𝗻 𝗯𝗶𝗼
#investmentbanking #privateequity #financecareers #financejobs #interviewprep #wacc
