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Average Cost of Capital

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Average cost of capital
A firm's required payout to bondholders and stockholders expressed as a percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total required cost of capital by the total amount of contributed capital.

Average Cost of Capital
The total amount that a company must pay in dividends on preferred stock and in coupons on bonds, expressed as a percentage of the total amount raised through the issue of stock and bonds. This shows what a company must spend in order to raise the capital it needs to maintain or expand operations.


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As these cash flows are future estimates their present value should be calculated through assumed discount rates called the weighted average cost of capital (WACC).
The Weighted Average Cost of Capital (WACC) is a calculation of a company''s proportionately weighted capital according to specific categories.
This formula is derived from the balance sheet identity and the definition of the weighted average cost of capital (for a similar presentation, see Berk and De Marzo, 2007).
 
 
 
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