Which formula correctly expresses WACC?

• A. WACC = Net income / Equity
• B. WACC = (D/V)*Rd + (E/V)*Re
• C. WACC = (E/V)*Re + (D/V)*Rd*(1-Tc)
• D. WACC = Cost of capital

Answer: (C)

WACC shows the cost of financing a company’s asset base by blending the costs of equity and debt in proportion to how the company is financed, while also accounting for the tax shield on debt. The debt portion is used after tax because interest is deductible, so the after-tax cost of debt is Rd(1 − Tc). The equity portion carries its own cost, Re, without a tax reduction. The total financing value is V = E + D, and the weights E/V and D/V reflect how much of the financing comes from equity and debt, respectively. Adding these weighted costs gives the overall minimum return the firm must earn to satisfy both shareholders and lenders. This is why the correct form is: WACC = (E/V) Re + (D/V) Rd(1 − Tc).

The other options don’t fit: using net income over equity is a return on equity, not a financing cost; omitting the tax shield on debt ignores a key tax advantage of debt; and equating WACC to a vague “cost of capital” lacks the actual weighted-cost structure.