Financial Terms / cost of capital

# Understanding the Cost of Capital

The cost of capital is an important factor to consider when evaluating capital budgeting projects and is calculated using the weighted average cost of capital formula which takes into account a company's cost of debt and equity.

## Formula

``WACC = E/V * Re + D/V * Rd *(1-T)``

## How do I calculate the cost of capital?

`The cost of capital is a key factor in financial analysis for a company. It should be calculated using a weighted average cost of all capital sources, such as debt and equity. The formula for this calculation is `WACC = E/V * Re + D/V * Rd *(1-T)`, where E is the market value of the company’s equity, V is the total value of the company’s debt and equity, Re is the required return on equity, D is the market value of the company’s debt, Rd is the required return on debt, and T is the corporate tax rate. This calculation can be performed using simple software tools such as Sourcetable.`

## What is the cost of capital?

`The cost of capital is the weighted average of the cost of debt and equity. It is a factor in deciding which financing path to follow.`

## Does the cost of capital include only debt or does it include equity too?

`The cost of capital includes both debt and equity.`

## Key Points

How do I calculate cost of capital?
`WACC = E/V * Re + D/V * Rd *(1-T)`