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Wacc

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The weighted average cost of capital formula is as follows: The E and the D in the weighted average formula are the firm’s equity and debt. According to our text the r above the little e is the required return for equity, and the r above the d is the required return for debt. L is the market value proportion of debt financing and T is the marginal corporate tax rate on income for the proposed project. In word format the equation states that WACC is the equity of the firm divided by the debt plus equity times the required return of equity plus the debt divided by the debt plus equity times one minus the marginal corporate tax rate on the project times the required return for debt. This should equal one minus the market value proportion of debt financing times the required return for equity plus the market value proportion of debt financing times one minus the marginal tax rate times the required return for debt. The WACC is expressed as an after-corporate-tax- return because investors are paid after the corporate taxes are. Furthermore, in regard to equity is also an after corporate tax return (Emery, Finnerty & Stowe, 2007).
To use the WACC one must understand the purpose is twofold. First as a measure to ensure that the financial obligation of the company is being held to a certain set of standards. The end goal of the WACC is to generate capital for those who hold stake within the company. When these numbers are not reflected are there are measured losses this is how the company can see that changes need to be made to shift in a profitable direction.

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