The Equation
A quick refresh on what the equation is for the weighted average cost of capital:
Equation
r
a
= r
e
* E/(D+E) + r
d
* D/(D+E)
a
= r
e
* E/(D+E) + r
d
* D/(D+E)
r
a
= Return on Assets
r
e
= Return on Equity
r
d
= Return on Debt
E = Equity Value
D = Debt Value
When we use this, we would take our debt yield as the rate of debt, and then our unlevered equity rate that we found before for the rate of equity. This equity rate is likely the average of a few similar companies’ unlevered equity rates.