The extended WACC formula. Often when we learn about how to calculate the cost of capital, we use the normal or traditional WACC formula, which is shown on the screen here. So we calculate the WACC using the cost of equity and the cost of debt, and the relative weightings of equity and debt in the company's capital structure. But what if a company has other sources of finance? For example, maybe it has a non-controlling interest, or even some financial assets in its capital structure. Well, the cost of capital is used to determine the enterprise value of the company, and this enterprise value includes all sources of finance. We can see here a company which has a non-controlling interest, that's the NCI, and also cash in its capital structure, as well as debt and equity. If the cost of capital is being used to determine the enterprise value, then the cost of capital should also include the expectations and relative weightings of all sources of finance, not just debt and equity. So we need to extend the traditional WACC formula to include these. Now, the extended WACC formula, which is shown here, includes the proportion of each source of finance in the EV, and the expected returns for each source of finance. A couple of nuances that need to be flagged though. Firstly, there's no tax shield on returns generated for non-controlling interests. That's because dividends paid to non-controlling interests are not usually tax deductible. Secondly, although there is a tax adjustment for returns generated on cash, it's important to note that the cash term is a negative adjustment to the formula. This is because these represent a return on capital rather than a cost of capital. The formula shown here includes NCI and cash, but we could include other financing sources such as preferred stock, debt equivalents, or even off-balance sheet debt, such as supply chain financing in our formula. One word of caution, though, when extending your WACC formula is that the WACC should always be based on the company's target capital structure rather than its current capital structure. So it's important to think really carefully about whether a company will continue to have significant cash, financial assets, or non-controlling interests in its target capital structure. Complexities in a target capital structure are usually the result of regulation. For example, a payment company that has restricted cash, or it's intrinsically linked to the company's operations. For example, beverage companies often have majority stakes in their bottling operations, so have very large non-controlling interests, or heavy industrial companies often have very large legacy pension liabilities. So you're likely to see similar capital structure complexities across the sector. So it's particularly important to look at other companies in the sector when determining what the target capital structure is, and whether to extend your WACC formula.