What is "WACC"?
What is "WACC"?
WACC (Weighted-Average Cost of Capital) is the average cost of investment in the business. How much does this business cost to invest by using WACC to evaluate whether it is worth investing in this business or not? From comparison with IRR (Internal Rate of Return), if IRR is greater than WACC, then it means that it should invest in that business.
The calculation of WACC has the following formula:
WACC = We*Ke +Wd*Kd *(1-T)
We is the proportion of shareholders Calculated from equity by using the formula
Equity + interest bearing debt
Wd is the proportion of creditors Calculated from interest-bearing debt using the formula
Equity + interest bearing debt
**Both parts can be viewed from the Company's balance sheet**
Ke is the cost of capital for shareholders (Cost of Capital), calculated from the CAPM formula (Ke = Rf + B*(Rm-Rf)).
Kd is the creditor's cost of investment (Cost of Debt). This cost must subtract the tax rate. Can be seen from the loan interest rate or the interest rate on the bonds issued by the company.
T is corporate income tax rate (Thailand uses 20%)
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