Weighted Average Cost of Equity - WACE

See: WACC.

There are really two ways to fund companies: Via debt, and via equity. The cost of debt is usually pretty easy to calculate, because there is usually some set interest rate to rent that principal until borrowers pay it back.

The cost of equity is different. You're a high growth internet company and you want to sell 10% of yourself to raise dough. Well, one player values you at $100 million, another values you at $50 million, and another values you at $200 million. You'll obviously go with the best valuation, but what was the cost of selling that equity? If in five years you are public after your IPO and Wall Street values you at $10 billion, then the 10% of yourself you sold was a cost, based on today's numbers, of $1 billion. Yet you sold 10% for only $20 million five years earlier. But could you have grown this much if you didn't raise capital five years earlier? Yeah, it's complex.