Question 1

What is WACC (Weighted Average Cost of Capital)?

Accepted Answer

WACC represents a company's average cost of capital from all sources, including common stock, preferred stock, bonds, and other long-term debt, weighted by their respective proportions.

Question 2

How does debt tax shield lower the cost of debt in WACC?

Accepted Answer

Interest paid on corporate debt is tax-deductible in most jurisdictions. The after-tax cost of debt equals the nominal blended interest rate multiplied by (1 - Corporate Tax Rate).

Question 3

Why is blended cost of debt important for corporate finance?

Accepted Answer

Most corporations hold multiple layers of debt (e.g., bank term loans, senior notes, mezzanine financing). Calculating the blended cost of debt determines the true hurdle rate for new capital expenditures.

WACC & Blended Debt Calculator

Understanding Corporate WACC & Debt Structure