Explain the use of the WACC. Make sure you talk about all of the components in your answer. a) The Weighted Average Cost of Capital (WACC) is a financial metric used to evaluate the cost of capital for a firm. It's calculated by taking a weighted average of the cost of equity and the cost of debt, with each component weighted by its proportion in the firm's capital structure. The formula is: WACC=(E/V)⋅re+(D/V)⋅rd⋅(1−Tc) Where:E = Market value of the firm's equity
D = Market value of the firm's debt
V = Total market value of the firm's equity and debt
re = Cost of equity
rd = Cost of debt
Tc = Corporate tax rate The components include the cost of equity, which reflects the return shareholders require, the cost of debt, representing the interest rate the company pays on its debt, and the corporate tax rate which affects the cost of debt.