Final answer:
The WACC equation calculates a company's cost of capital, weighing each type of financing (debt and equity). It combines the cost and weight of debt and equity, adjusting for taxes on the debt side to account for the interest tax shield.
Step-by-step explanation:
The equation in question refers to the Weighted Average Cost of Capital (WACC), which is a calculation of a company's cost of capital in which each category of capital is proportionately weighted. Here's a breakdown of each component:
Therefore, the WACC is calculated by multiplying the cost of each component (debt and equity) by its respective weight and then summing these products together, reflecting the overall cost of financing the company's operations considering both debt and equity sources