[Verse 1]
When a company needs to raise some cash
They've got choices, let's not be too rash
Equity from shareholders, debt from the bank
Each source has a cost, let's fill in the blank
The interest on bonds is easy to see
But equity's trickier, what's the fee?
We need one number to rule them all
The weighted average is our call
[Chorus]
WACC is the way, the way to calculate
Market value weights, don't hesitate
Cost of debt times weight, plus equity's rate
Times its weight too, that's how we navigate
WACC shows the cost of capital true
Every funding source gets weighted through
The formula's simple, the concept's clean
The best cost of capital you've ever seen
[Verse 2]
First find the cost of debt we pay
Take the interest rate, then take away
The tax shield benefit, don't forget
After-tax cost of debt is what we get
For equity cost, we use CAPM
Risk-free rate plus beta's premium
Market risk premium times the beta score
Add to risk-free rate, that's what it's for
[Chorus]
WACC is the way, the way to calculate
Market value weights, don't hesitate
Cost of debt times weight, plus equity's rate
Times its weight too, that's how we navigate
WACC shows the cost of capital true
Every funding source gets weighted through
The formula's simple, the concept's clean
The best cost of capital you've ever seen
[Bridge]
Market value matters, not the book
That's the weight we need to take a look
Debt plus equity equals total worth
Each component's portion shows its girth
Divide each piece by the total sum
Those are the weights when calculation's done
[Verse 3]
Now we multiply each cost by weight
Debt cost times debt weight, don't be late
Equity cost times equity weight
Add them together, we calculate
The weighted average cost of all
This hurdle rate stands ten feet tall
Every project must clear this bar
WACC's the financial North Star
[Chorus]
WACC is the way, the way to calculate
Market value weights, don't hesitate
Cost of debt times weight, plus equity's rate
Times its weight too, that's how we navigate
WACC shows the cost of capital true
Every funding source gets weighted through
The formula's simple, the concept's clean
The best cost of capital you've ever seen
[Outro]
When you're valuing firms or projects new
WACC's the discount rate for you
Market weights and after-tax cost
Without this knowledge, you'd be lost