Weighted Average Cost of Capital

Weighted Average Cost of Capital

The weighted average cost of capital is nothing but the overall cost of capital. In this context, it is to be stated that the weighted average cost of capital is calculated by considering the specific costs of each of the sources of capital. For example, the cost of equity, cost of preference share and the cost of debt capital are considered while computing the weighted average cost of capital. In addition to that, the cost of retained earnings is also considered as one of the important parts of calculating the weighted average cost of capital of a company.

In order to calculate the weighted average cost of capital, it is required to calculate the cost of each source of capital in the initial stage. In this regard, the proportion of each source of capital is also required to be calculated. After this, the proportion of each source of capital is to be multiplied by the specific costs in order to calculate the weighted cost of each capital source. The weighted average cost of capital can be calculated by adding the weighted specific costs together. This can be further explained with the help of the following formula:

W_K = (W_E * K_E) + (W_P * K_P) + (W_D * K_D) + (W_R* K_R)

Where,

W_K =The weighted average cost of capital

W_E = Proportion of equity capital

K_E = Cost of equity share capital

W_P = Proportion of preference share capital

K_P = Cost of preference share capital

W_D = Proportion of debt capital

W_R = Proportion of retained earnings 

K_R = Cost of retained earnings. 

Excel Sheet for calculating the Weighted Average Cost of Capital

Weighted Average Cost of Capital