In the WACC formula, what do the variables E, D, P, and V represent?

• A. E = market value of equity; D = market value of debt; P = market value of preferred stock; V = E + D + P.
• B. E = earnings; D = depreciation; P = profits; V = volume.
• C. E = enterprise value; D = dividends; P = profits; V = value.
• D. E = earnings before interest; D = debt after tax; P = premium; V = variance.

Answer: (A)

The key idea is that WACC uses the market values of the different sources of a company’s financing. In this framework, E represents the market value of equity, D is the market value of debt, P is the market value of preferred stock, and V is the total market value of the firm’s financing, which equals E plus D plus P. These are the weights you use in the WACC calculation to reflect how much each component contributes to the overall capital structure.

Options that mix up these meanings—using earnings, depreciation, profits, or volume—don’t correspond to the inputs of WACC. Also, treating enterprise value or other terms as V would misrepresent what the formula is weighting. So the described definitions align with how WACC is constructed and interpreted.