The weighted average cost of capital (WACC) is the weighted average after-tax cost of an organization's various sources of financing, such as debt and stock. In this chapter, you learned that WACC is used when calculating economic value added. WACC is also used in capital budgeting.
Calculations for the weighted average cost of capital are usually found in finance textbooks. The formula is simple: determine how much financing comes from various sources and then calculate the weighted average. For example, suppose a company has $600,000 financing from debt at a pretax interest rate of 7% and $400,000 financing from equity having a cost of 9%. The company's tax rate is 30%, and only the interest is tax deductible. WACC is 6.54%, calculated as follows:

Although the computations are simple, it is not always easy to find the information needed for the computations. For example, consider the following balance sheet for Amazon.com as of December 31, 2007 (amounts in millions).18

18Amazon.com financial statements are available at phx.corporate ir.net/phoenix.zhtml?c=97664&pirol-reportsAnnual.
EXCERPTS FROM NOTES 4 AND 5: LONG-TERM DEBT AND OTHER
The Company's long-term debt and other long-term liabilities are summarized as follows (in millions):
4.75% Convertible Subordinated Notes................................. $899
6.875% PEACS due February 2010...................................... $350
Other long-term debt ........................................................$ 50
Less: Current portion of long-term debt................................. ($ 17)
Tax contingencies ............................................................$ 98
Long-term capital lease obligations .......................................$ 62
Construction liability........................................................ $ 15
Other long-term liabilities.................................................. $117
REQUIRED
A. Explain why book values might be poor estimates of market values for Amazon's debt and stock.
B. Which liabilities do you think should be included in the WACC computation? Explain your choices.
C. Identify possible sources of information for the following:
1. Market value of common shares
2. Cost of equity capital
3. Market value for each type of debt
4. Pretax interest rates
5. Income tax rate

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MarketAfter-Tax Weighted Source Debt Equity lotal $600,000 400,000 $1,000,000 Proportion 60% 40% 100% Cost 4.9% 9.0% Cost 2.94% 3.60% 6.54% EXCERPTS FROM BALANCE SHEET Current liabilities Long-term debt and other Common stock-$0.01 par value $2,532 $1,574 Issued and outstanding shares-847 shares Additional paid-in capital Treasury stock, at cost Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders' equity Total liabilities and stockholders' deficit 4 $3,063 ($ 500) ($1,375) $1,197 $6,485