Weighted Average Cost Of Equity- WACE

Posted in Finance, Accounting and Economics Terms, Total Reads: 218
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Definition: Weighted Average Cost Of Equity- WACE

Weighted average cost of equity is a method of finding out the equity of an organization by assigning weightages to different parameters. It doesn’t accumulate the bulky retained earnings, preferred shares and common stocks together but takes into consideration the total value of the shares. It provides a more accurate picture of the company. For evaluating the cost of capital of an organization, it is very important to know the value of shares of the company. For estimating the profitability of the company in future, it is important to know the cost of capital of the company.

 

WACE gives more weightage to the value of shares of the company and hence it provides a more appropriate valuation of the company. For example, let’s assume the cost of common stock, retained earnings and preferred stocks is 30%, 20% and 10% respectively and the weightage of common stock, retained earnings and preferred stocks in the portion of equity is 40%, 10% and 10% respectively.


Hence WACE can be calculated by:

WACE= (0.3*0.4) + (0.2*0.1) + (0.1*0.1) = 0.15

Hence, this concludes the definition of Weighted Average Cost Of Equity- WACE along with its overview.

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