How is the weighted average cost of capital (WACC) calculated?

The weighted average cost of capital (WACC) is calculated by averaging the costs of equity and debt, considering their respective proportions in a company's capital structure. This method reflects how much a firm is expected to pay on average to finance its assets, taking into account the cost associated with both equity and debt.

To determine WACC, the cost of equity is multiplied by the proportion of equity in the overall capital structure, and the cost of debt is multiplied by the proportion of debt. These products are then summed together to yield a single rate that represents the average cost of financing. This approach ensures that each component's contribution to the overall cost of capital aligns with its weight in the total capital structure, leading to a more accurate assessment of financing costs for the firm.

Other options do not accurately represent the method for calculating WACC, as they either lack the necessary weighting by proportions or misinterpret the relationship between costs of capital.