Which formula is used to calculate the WACC?

The formula for calculating the Weighted Average Cost of Capital (WACC) reflects the overall cost of capital for a company, taking into account both equity and debt financing. The correct formula accurately captures the costs associated with each source of capital weighted by their proportion in the overall capital structure.

In the correct option, the cost of equity is multiplied by the percentage of equity in the company's capital structure, representing the return required by equity investors. Similarly, the cost of debt is multiplied by the percentage of debt and adjusted for taxes using (1-TR) to account for the tax shield provided by the interest expense. This means that interest payments on debt are tax-deductible, effectively reducing the cost of debt for the company.

This formulation is essential because it provides a comprehensive picture of the company's financing costs and helps in making informed financial decisions about investments, evaluating projects, or understanding overall company performance. It balances the cost of equity and the after-tax cost of debt to arrive at an overall percentage that indicates the average rate of return required from all capital providers.

The other options do not correctly represent the WACC calculation. For example, one option simply adds cost of debt and cost of equity without accounting for their respective proportions or the tax effect, while another option