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WACC or Weighted Average Cost of Capital: Summary “Cheat Sheet” by MBAbullshit.com
 Money (capital) needed to run a company comes from either borrowing (debt) or the owners’ money (equity). The COST of capital is either the interest payment on the debt, or the required profit that the owners want in return for their investment (in MBA bullshit language: “expected return”). The expected return or COST OF EQUITY is determined by another financial model, the CAPM or the CAPITAL ASSET PRICING MODEL. Go to MBAbullshit.com or click here to learn more about it (get my eBook or watch our FREE video). When you COMBINE BOTH the interest rate of debt AND the ‘expected return’ of the investors/owners, we get the total cost of capital. If the cost of debt (e.g. interest) and cost of equity (expected return) are different, then we have to get an AVERAGE of the two to get our COST OF CAPITAL Cost of capital is expressed as a percentage; because it’s compared to the total capital (as a percentage of the total capital). Just like bank loan interest is expressed as a percentage of your total loan. What if your company has more debt vs. equity, OR vice versa? Then our formula must give more importance or ‘WEIGHT’ to whichever is bigger; and must give LESS weight to whichever is SMALLER. Thus, we have the WACC or Weighted Average Cost of Capital concept. To learn this better, you may want to download my eBook and watch my FREE video at MBAbullshit.com or click here. This is the basic WACC or Weighted Average Cost of Capital Formula:

















WACC = (Debt Proportion)(Cost of Debt %)(1 - tax rate %) + (Equity Proportion)(Cost of Equity %)  To understand this formula step-by-step in action, watch my free video at MBAbullshit.com or click here. See infographic on next page:



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