Which variable in the WACC formula represents the cost of equity?

In the Weighted Average Cost of Capital (WACC) formula, the cost of equity is denoted by the variable Re. This variable represents the returns that equity investors require on their investment in the firm, reflecting the risk associated with holding equity shares.

The cost of equity is critical in determining a company’s overall cost of capital because it influences the attractiveness of purchasing shares versus alternative investments. Understanding this component of WACC helps stakeholders assess a firm's capital structure and make decisions regarding financing and investment.

The other variables in the WACC formula serve different purposes: Rd denotes the cost of debt, which is the effective rate a company pays on its borrowed funds; T stands for the corporate tax rate, which affects the after-tax cost of debt; and D represents the market value of debt. Each plays a distinct role, but when it comes to representing the cost of equity, Re is the definitive variable.