Formula for WACC includes which components?

Formula for WACC includes which components?

• A. Cost of Equity, Cost of Debt(1-tax), Cost of Preferred
• B. Cost of Equity, Cost of Debt, Cost of Preferred without tax effects
• C. Cost of Equity * % Equity + Cost of Debt * % Debt * (1 - tax) + Cost of Preferred * % Preferred
• D. Market capitalization divided by enterprise value

Answer: (C)

WACC is the blended cost of a company's financing sources, combining the costs of equity, debt (after tax), and preferred stock, each weighted by its share of total financing. The debt portion uses the after-tax cost because interest reduces taxable income, creating a tax shield. So put together, WACC = Re × (equity share) + Rd × (debt share) × (1 − tax rate) + Rp × (preferred share). The option that matches this exactly multiplies each cost by its respective weight and includes the after-tax debt term, which is why it’s the correct choice. The other formulations either omit the tax shield, fail to weight by market-based capital shares, or include unrelated ratios like market cap to enterprise value.

WACC is the blended cost of a company's financing sources, combining the costs of equity, debt (after tax), and preferred stock, each weighted by its share of total financing. The debt portion uses the after-tax cost because interest reduces taxable income, creating a tax shield. So put together, WACC = Re × (equity share) + Rd × (debt share) × (1 − tax rate) + Rp × (preferred share). The option that matches this exactly multiplies each cost by its respective weight and includes the after-tax debt term, which is why it’s the correct choice. The other formulations either omit the tax shield, fail to weight by market-based capital shares, or include unrelated ratios like market cap to enterprise value.