Computation

• 1). Compute the value of the firm's total financing by adding (1) the amount of debt the firm carries, (2) the value of the firm's common equity outstanding, and (3) the amount of preferred stock the firm has issued by the firm.
  
  
• 2). Divide the amount of debt the firm carries by the value of the firm's total financing and multiply by the weighted average interest cost of the firm's debt financing (as a percentage).
  
  
• 3). Multiply the value in Step 2 by 1 minus the firm's tax rate. For example, if the firm's tax rate is 0.35, or 35%, multiply the value in Step 2 by 65%. The resulting value is the firm's debt-weighted average contribution to the cost of capital.
  
  
• 4). Divide the value of the firm's common equity outstanding by the value of its total financing and multiply by the expected rate of return on the firm's equity (as a percentage). The resulting value is the firm's equity-weighted average contribution to the cost of capital.
  
  
• 5). Divide the amount of preferred stock the firm has issued by the value of the its total financing, and multiply by the dividend rate on the its preferred stock (as a percentage). The resulting value is the firm's preferred-stock weighted-average contribution to the cost of capital.
  
  
• 6). Add the values in steps 3, 4 and 5. This is the firm's weighted average cost of capital.