Finance Lab
A formula is not a fact. It is a decision.
Each experiment walks the same six stages: read the formula, understand what it claims, manipulate the variables, observe the sensitivity, solve for a target, then apply it to a decision.
Corporate Finance
Cost of capital and CAPM
WACC = (E/V) × Re + (D/V) × Rd × (1 − t)
WACC is the blended after-tax cost of the capital a company uses. It becomes the discount rate for projects of average risk.
What each symbol means
- Market value of equity
- E in the formula.
- Market value of debt
- D in the formula.
- Risk-free rate
- Return on a default-free asset.
- Beta
- Sensitivity of the shares to the market.
- Expected market return
- Return expected from the market portfolio.
- Pre-tax cost of debt
- Interest rate on borrowings.
- Tax rate
- Effective corporate tax rate.