| The weighted average cost of capital (WACC) calculations
are identical for all cost of equity models. The only variable for each
WACC calculation is the cost of equity for each model. The following formula
is used to derive the WACC:
where,
WACCi = Weighted average
cost of capital for company i;
wE = Weight of equity
capital in company i’s capital structure, equal to equity capital
divided by total capital;
REi = Cost
of equity for company i;
wD = Weight of debt
capital in company i’s capital structure. Equal to debt capital
divided by total capital;
RDi = Cost
of debt for company i;
t = Tax rate, assumed to be 35%;
wP = Weight
of preferred stock capital in company i’s capital structure, equal
to preferred stock capital divided by total capital; and,
RPi = Cost
of preferred stock for company i.
Dollar values for debt and preferred stock are both book
amounts. The cost of preferred stock is equal to preferred dividends paid
divided by the dollar value of preferred stock reported in the company’s
financial statements.
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© Copyright 1997
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Cost of Capital Quarterly
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Ibbotson Associates
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1997 Yearbook
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http://valuation.ibbotson.com
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Data updated through March 1997
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