Here we see a little bit more detail on the WACC formula It starts off with cost of equity multiplied by equity as a proportion of your funding That's equity over equity plus debt. Here we've assumed all of your funding comes from equity plus debt So it's equity divided by 100% of your funding If you had another source of funding such as preference shares, we would have to include that as well The cost of equity is the required return on equity. And that's what the shareholders require as their return Then multiply that by the proportion of funding But important here is that it's the market value of equity as proportion of funding that we want That could be many years out of date, the share price might have changed dramatically since We want to know the WACC today, not many years ago So that's the equity we dealt with, we now move onto the cost of debt And initially it's quite similar, cost of debt times by the proportion of funding from debt i.e. debt over equity plus debt Our cost of debt is the required return by debtholders Let's say they wanted a return of 5%, we then multiply that by that by debt over equity plus debt And again it's the market value of debt we use The big difference with debt, is this cost of debt is multiplied by one minus tax. Now why is that? Well imagine your cost of debt is fine i.e the debtholders want a return of 5 You pay them 5 and that's interest. But interest is tax deductible, it's an extra expense in the income statement So if they receive 5 and the tax rate is 20% We actually save one of tax So five times one minus the 20% will equal 4. The net cost to the company will be 4 So we take cost of debt times one minus tax, and that tax rate is your marginal tax rate Remember interest is only changing your profit marginally So we use the marginal tax rate and multiply it by your proportion of funding from debt