Capital = Debt + Equity so...

Calculating WACC is applying a simple weighted average to the Cost of Debt (Kd) and the Cost of Equity (Ke) to calculate the overall Cost of Capital.

To understand a weighted average, consider the average of two numbers: 5 and 5, which is calculated by(5 + 5)/2. The same calculation is 1/2 x 5 + 1/2 x 5; where a weight of 1/2 is applied to each number. For three numbers: 5, 5 and 5, the average is(5 + 5 + 5)/3 OR 1/3 x 5 + 1/3 x 5 + 1/3 x 5. In this example a weight of 1/3 is applied to each number.

The weights applied to Kdand Kecome from the capital structure of the business, where the proportion of equity to capital is the weight for Kewhile the proportion of debt to capital is the weight for Kd.The complete formula for WACC is:E/V x Ke+ D/V x Kd

...where E is the $ value of equity, D is the $ value of debt and V is the $ value of total capital in the company.

Using the WACC formula, answer the following question:

BHP has a total of $100 million of capital; of which $60 million is Equity and $40 million is debt. Shareholders expect a return (Ke) of 12% per annum, while debt holders are paid overall 7% per annum in interest (Kd). Calculate the Weighted Average Cost of Capital for BHP.