Register now or log in to join your professional community.
After you have calculated the cost of capital for all the sources of debt and equity that you use, then it is time to calculate the weighted average cost of capital for your company. You weight the percentage of the capital structure that each source of debt andequity capital is by the cost of the source ofcapital.
TOTAL FIRM EQUITY IN % * ( COST OF EQUITY ) + TOTAL FIRM DEBT IN % * ( COST OF DEBT) * (1 - FIRM TAX )
By sum the cost of equity multiplied by the percentage equity in capital structure with the weighted average cost of debit multiplied by the percentage debt in capital structure. And the value of the company can be computed as the present value of the cash flow it produces discounted by the costs of capital used to finance it. The lower the overall cost of capital the higher the value of the company.
