## Weighted Average Cost of Capital (WACC / Ko)
A company rarely raises all its funds from one source — it uses a mix. So the overall cost of capital is the weighted average of the costs of the individual sources, weighted by their proportion in the capital structure.
- WACC is the overall cost of capital; it depends on the company's capital structure.
- It represents the minimum rate of return at which the company creates value for its investors.
### Steps to compute WACC
1. Total capital = Long-term debt + Preference capital + Equity capital + Retained earnings. (Exclude short-term debt.)
2. Compute the proportion (weight) of each source to total capital.
3. Multiply each weight by that source's cost (Ke, Kd, Kp, Kr).
4. Aggregate the weighted costs → WACC.
$$WACC = (w_e K_e) + (w_d K_d) + (w_p K_p) + (w_r K_r)$$
### Choice of weights — Book Value vs Market Value
- Book Value (BV) weights: operationally easy and convenient.
- Market Value (MV) weights: more correct — represent the firm's true capital structure.
## Marginal Cost of Capital (MCC)
The MCC is the cost of raising an additional rupee of capital — the cost of new funds.
- Computed exactly like WACC, but only on the new funds raised.
- Use marginal weights: the proportion in which the firm intends to raise the new funds, applied to the marginal component costs.