After calculating costs, they are multiplied by weights of various sources of capital to obtain a weighted cost of capital (WACC). The composite, cost of capital is the weighted average of costs of various sources of funds. It is relevant in calculating over all cost of capital.
The following steps are involved to calculate weighted average cost of capital:-
1) Calculate cost of specific sources of funds (i.e. cost of debt, cost of equity, cost of preference capital etc).
2) Multiply cost of each sources by its proportion in capital structure.
3) Add weighed components costs to get firm’s weighted average cost of capital.
In order to calculate weighted cost of capital component cost should be ofter tax costs.